Research Project Part 1 - Ford Motor Co

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Research Project Part 1: Ford Motor Company Your Name UMGC: Business Finance 330 Your Professor June 21, 2022 1
Ford Motor Company Ford Motor Company, commonly known simply as Ford, is an American automobile company headquartered in Dearborn, Michigan. The company was founded by Henry Ford in 1903. Henry Ford notably contributed to the automobile history and auto production methods by introducing the first moving assembly line in 1913. With this production method, Ford mass produced the Model T selling over a million units in its 20-year run (Ford, 2022). Ford Motor Company is publicly traded on the New York Stock Exchange as NYSE: F and their fiscal year runs from January 1 st to December 31 st of each year. The purpose of this report it to evaluate Ford’s financial performance and viability over the next 2-3 years. Trend Analysis The income statement shows the company’s financial position and performance over a period while the balance sheet shows the financial position at a specific point in time (Stobierski, 2020). Both with the cash flow statement will provide the company leadership and investors with a data that can be used to analyze the company’s health. The following chart depicts Fords financial growths over the last 5 years using the information from marketwatch.com. Ford Motor Co* 2017 2018 2019 2020 2021 Sales Growth - 2.27% -2.77% -18.45% 7.23% Cost of Goods Growth - 3.58% -0.58% -16.35% -2.30% Gross Income Growth - -4.99% -16.02% -33.46% 93.05% Interest Expense Growth - -12.01% -17.61% 61.67% 9.34% Net Income Growth - -52.44% -98.72% -2,821.28% 1502.42% Cash & Short- Term Investments Growth - -12.78% 2.06% 44.18% -0.74% Total Assets - Growth - -0.76% 0.78% 3.37% -3.38% 2
*MarketWatch (2022). The information provided above overall depicts that Ford Motor Company was greatly affected by the COVID-19 global pandemic. Ford’s sales in 2019 were down $5 Billion from 2018 and continued to drop another $28 Billion in 2020. Gross income dropped by almost an astonishing 50% from 2018 to 2020. Before COVID-19 greatly affected Ford’s finances, Ford had implemented a strategy to reduce diminishing sales numbers. Ford announced in 2018 they would eliminate production on all full, mid and subcompact cars in North America and shift resources the booming side of the market: pickups, SUVs, and crossovers vehicles (Eisentein, 2018). This strategy initially paid off, but COVID caused 4 Ford plants to completely shut down halting production on their top selling vehicle, the F-150. In 2021, Ford began to show significant increases in gross and net income with smaller growth in sales and interest expense. Although still in negative or red numbers, COGS depicted a drastic improvement with cash & short-term investments and total asset growths plummeting. Overall, Ford’s financial health and stability is thriving post pandemic Financial Ratio Analysis The quick and current ratio of a company are liquidity ratios that help investors and company leadership gauge the company’s ability to meet its debt obligations. The following chart is Ford’s quick and current ratio along with some operating performance ratios, profitability ratios, and return on investment ratios. Ford Motor Co* 2017 2018 2019 2020 2021 Quick Ratio 1.13 1.11 1.10 1.20 1.07 Current Ratio 1.24 1.23 1.22 1.32 1.21 Operating 3
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Performance Ratios Days of Sales in Inventory 26.65 28.79 29.82 34.95 36.41 Days of Sales Outstanding 139.90 146.10 150.35 165.47 128.91 Days of Payables Outstanding 61.95 60.00 57.17 69.40 70.92 Receivable Turnover 2.61 2.50 2.43 2.21 2.83 Inventory Turnover 13.70 12.68 12.24 10.44 10.03 Fixed Assets Turnover 2.52 2.49 2.38 1.95 2.12 Total Assets Turnover 0.63 0.62 0.61 0.48 0.52 Profitability Ratios Gross Profit Margin % 16.23 15.01 13.60 11.32 15.91 Operating Profit Margin % 8.88 7.90 6.44 3.30 7.17 Net Profit Margin % 4.85 2.29 0.03 -1.01 13.16 Return on Investment Ratios Return on Assets % 3.07 1.43 0.02 -0.49 6.84 Return on Equity% 23.73 10.83 0.14 -4.00 45.29 *Morningstar (2022) The quick ratio measures the company’s ability to meet its short-term obligations with its most liquid assets. This is calculated by taking the Total Current Assets minus Total Inventories divided by its Total Current Liabilities. Ford’s quick ratio for 2021 was 1.07. This indicates Ford has good short-term financial strength and can quickly turn assets in cash. The current ratio measures Ford’s ability to pay off short term debt. This is calculated by taking current assets and dividing by its current liabilities. Ford’s current ratio for 2021 was 1.21 indicating Ford Motor Company can pay off their short-term debt with their current assets. Having the ability to pay off short-term debt or obligations with-in one year indicates a high level of liquidity and less chance of a cash squeeze (Enkhbayar, 2018). This demonstrates the company management is generating substantial profit 4
on the company’s assets. In 2020, Ford experienced a loss on return on assets by - 0.49% and return on equity of -4%, which had not been seen in recent years. Those ratios rose again in 2021 by a substantial amount positioning Ford in an improving financial state. Inventory turnover measures how fast a company can sell their inventory. Ford’s inventory turnover for 2021 was 10.03. This indicates that Fords is turned over 10 times in that given year. Before COVID, Ford averaged around 12 times of inventory turnover. Ford must continue to be efficient selling their inventory and continue to increase return on assets and equity which will result with an improvement on quick and current ratios. Return on Equity (ROE) using DuPont Analysis The DuPont analysis is a framework for analyzing performance allowing investors to focus on key metrics of financial performance to identify strengths and weakness (Hargrave, 2022). The DuPont Analysis uses an expanded return on equity formula as follows: DuPont Analysis = Net Profit Margin x Asset Turnover x Financial Leverage Ford Motor Co 2019 2020 2021 Net Profit Margin 0.03 -1.01 13.16 Total Asset Turnover 0.61 0.48 0.52 Financial Leverage 7.79 8.71 5.30 DuPont Analysis 0.14 -4.22 36.27 Tesla 2019 2020 2021 Net Profit Margin -3.51 2.19 10.25 Asset Turnover 0.77 0.73 0.94 Financial Leverage 5.18 2.35 2.06 5
DuPont Analysis -13.99 3.76 19.85 Morningstar (2022) Tesla, Inc. is an automobile company based out of Austin, TX that designs and manufactures electric cars. Both Tesla and Ford are leading the electric vehicle (EV) market with the Tesla Model 3 and Mustang Mach E. By using the DuPont Analysis, the company’s operating efficiency, asset efficiency and how well the company is using debt to finance operations. The number resulting after calculating the above formula is how much the company is generating for every dollar invested. Ford was well below Tesla in 2019 and 2020. While Tesla was affected by COVID-19, it was able to maintain ROE above its investments in 2020 and 2021 after being almost 14% below investments in 2019. Ford had a decline in 2020 but was able to recover in 2021 to over 36%. The strategy implemented by Ford has been working as they have been able to improve ROE by over 40% in the last year. They need to continue this path and climb well above their automobile rivals such as Tesla and General Motors. Recommendation After detailed research on the financial state of Ford Motor Company, the results lead to some key factors for the company to improve financial sustainability. Management needs to reduce the cost of goods sold and cost of production. Another area to focus is reduce the operating expenses. Reduction in operating cost will influence income and equity increase. Ford needs to continue to stay above 1 on quick and current ratios. This can mainly be achieved by reducing their liabilities. 6
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Finally, Ford should focus on their return on equity as it significantly benefits the company. The funds remaining from the assets after subtracting the liabilities should be re-invested thus increasing return on equity. Reflection This assignment has further enhanced my knowledge on analyzing financial data of a given company. The ability to read and understand the financial statement, balance sheet, and cash flow statement has allowed be to identify when a company is liquid. As a future businessman, the knowledge gained with this assignment is ensuring I can make wise investment decisions and/or lead a company by making wise financial decision resulting in income, equity and efficiency. 7
References Eisenstein, P. (2018). Ford to stop making all passenger cars except the Mustang. NBCNews.com. Retrieved from https://www.nbcnews.com/business/autos/ford-stop-making-all-passenger- cars-except-mustang-n869256 Enkhbayar, A. (2018). Ford Motor Company’s Financial Analysis. Minnesota State University. Retrieved on June 21, 2022, from https://red.mnstate.edu/thesis/150/ Ford (2022). Our History. Ford Motor Company: Corporate . Retrieved from https://corporate.ford.com/about/history.html Hargrave, M. (2022). DuPont Analysis. Investopedia.com. Retrieved from https://www.investopedia.com/terms/d/dupontanalysis.asp MarketWatch (2022). Ford Motor Co: NYSE: F. Marketwatch.com. Retrieved on June 21, 2022, from https://www.marketwatch.com/investing/stock/f/financials Morningstar (2022). Ford Motor Co – Stock Operating Performance. Morningstar Investor. Retrieved on June 21, 2022, from https://www.morningstar.com/stocks/xnys/f/performance Stobierski, T. (2020). 4 Steps to Determine the Financial Health of Your Company. Harvard Business School. Retrieved from https://online.hbs.edu/blog/post/how-to- determine-the-financial-health-of-a-company 8