The purpose of this paper is to provide the financial statement analysis of Ford Motor Company and its subsidiaries when applying the data of 2019. The reason is that it is necessary to evaluate the current position of the company in the market and compare the results with the data for 2012. The ratio analysis indicates that Ford Motor Company and subsidiaries are characterized by the appropriate level of liquidity, the comparably medium level of operating efficiency, the appropriate capital structure, and comparably high profitability. The recommendations for the future analysis of the company based on trend analysis are also provided.
Financial Statement Analysis: Ford Motor Company and Subsidiaries (2019)
The financial analysis of any company is a useful tool to demonstrate a firm’s financial success in the context of the market development and with reference to a certain time period. The focus on the information related to Ford Motor Company and its subsidiaries in 2019 is based on the fact that the situation in the automotive industry has changed significantly since 2012. In spite of the fact that much attention was paid to completing the analysis of financial statements related to Ford Motor Company and its operations in 2012, there is still a gap in understanding the liquidity, operational efficiency, capital structure, and profitability of this company and its subsidiaries referring to the latest data. The financial statement analysis of Ford Motor Company applying the data of 2019 will indicate the current position of this company in the market to compare the results with 2012 data and provide the recommendations for the trend analysis.
Background of Ford Motor Company and Subsidiaries, the Automotive Industry, Economy, and the Outlook for the Future
Ford Motor Company was established by Henry Ford in the suburbs of Detroit, Michigan, in 1903. The company specializes in manufacturing vehicles under different brands, including the Lincoln brand for luxury automobiles. Ford employs about 190,000 individuals in the world, who work in the company’s offices and subsidiaries. Thus, the company has several subsidiaries all over the globe, including Ford of Europe, Ford Australia, Ford do Brasil, Ford Sollers, Ford Lio Ho, and Changan Ford in the transportation sector. Other subsidiaries include Ford Credit (a financial sector), Getrag, and Automotive Components Holding. It is important to note that 5,386,000 vehicles were sold by the company in 2019, supporting its leading status in the market (Ford Motor Company, 2019). The effective work of the company with its subsidiaries provides the grounds for having a large market share and being regarded as the fifth-largest automotive company in the globe.
The automotive industry is an actively developing sector that significantly depends on changes in oil prices and other macroeconomic factors. The key competitors of Ford Motor Company in this industry include General Motors, Volkswagen, Toyota, Hyundai, and Honda that become more popular in the US and European markets (Ford Motor Company, 2019). The role of a buyer in this market is high, and this aspect influences the intense competition in the industry.
Much attention should also be paid to the factors of the economy. The reason is that the financial position of Ford Motor Company, as well as its sales and the acceptance of new or changed products in the market, depends on changes in prices associated with global economic trends and fluctuations in oil prices (Ford Motor Company, 2019). Other economic factors include the progress of the currently observed economic crisis, the decreased buyer ability and power, the decreased interest in large or luxury vehicles, and fluctuations in currency exchange rates.
In this context, the outlook for the future is the following: it is possible to expect a decrease in the company’s profitability because of the further potential progress of the economic crisis caused by the pandemic and reduced sales. Ford Motor Company will need to adapt to the situation to overcome the effects of negative economic environments (Ford Motor Company, 2019). Thus, it is possible to observe significant market volatility in the future.
Analysis of Financial Statements
To conclude regarding the financial status of Ford Motor Company and its subsidiaries, it is necessary to conduct a financial ratio analysis. This approach will allow for stating whether the firm has succeeded in terms of its liquidity, operational efficiency, capital structure, and profitability (Damjibhai, 2016). The discussion of the results according to the assessment of the company’s financial statements will be provided in detail.
Analysis of the Short-Term Liquidity of the Company
To calculate the selected company’s liquidity, it is necessary to apply the following ratios: the current ratio, the current cash debt coverage ratio, as well as the acid test ratio. The current ratio is measured to assess the ability of a firm to address its short-term obligations. It is usually calculated with the help of dividing a company’s current assets by its current liabilities (Epstein, 2014). For Ford Motor Company in 2019, current ratio was equal to (in millions) $114,047 / 98,132 = 1.16 (Ford Motor Company, 2019). This current ratio is almost 1:1, which is why, it can be viewed as comparably low (Thomas & Basariya, 2019). Comparing it with the industry standards, it is possible to state that the ratio is similar to other companies’ ratios, and it has not changed since 2012.
The current cash debt coverage ratio is used to measure how a firm can address current liabilities using its operations and associated cash. It is calculated with reference to measuring how net cash from operating activities is related to a company’s current liabilities (Epstein, 2014). For the selected company, the following figure is found: $17,639 / 98,132 = 0.18 (Ford Motor Company, 2019). This figure indicates that the company experiences some problems with generating enough cash to cover its short-term debts.
The acid test ratio or quick ratio is calculated with the help of dividing liquid current assets that include cash, receivable accounts, and investments by total current liabilities. Referring to the data for Ford Motor Company and its subsidiaries in 2019, the acid test ratio was equal to $258,537 / 98,132 = 2.6. This ratio is rather high (higher than 1:1), and it indicates the possibility for Ford to quickly turn its assets into cash (Ford Motor Company, 2019). The analysis of Ford Motor Company’s liquidity indicates that it can address short-term debts and cover liabilities taking one of the leading positions in the industry, and higher liquidity is not typical of this market.
Analysis of the Operating Efficiency of the Company
The operating efficiency of the firm is measured in order to understand how effectively a company utilizes its resources and how its resources and operations are used and organized to decrease costs. The ratios that are applied to achieve this evaluation goal are accounts receivable turnover ratio, inventory turnover ratio, total asset turnover ratio, along accounts payable turnover ratio (Epstein, 2014). To measure operating efficiency for Ford Motor Company, it is necessary to apply such two activity ratios as the inventory turnover ratio and the total asset turnover ratio.
Thus, the inventory turnover ratio is calculated by dividing the costs of sold goods by the average inventory that is determined for a certain period. For the whole year of 2019, the inventory turnover ratio for Ford Motor Company was (in millions) $134,693 / 10,786 = 12.5 (Ford Motor Company, 2019). For the period of the fiscal year of 2019, the company sold and replaced its inventory 12 times, and for the period of 12 months, this figure is discussed as acceptable.
The total asset turnover ratio is calculated with the help of dividing a company’s net sales by its average total assets. For Ford Motor Company, it is necessary to determine the total assets at the beginning of the year and at the end to find out the average total assets. In 2019, total asset turnover ratio was $155,900 / 112,256 = 1.4 (Ford Motor Company, 2019). This ratio is comparably low, and a higher ratio is desired for the company to ensure it effectively uses its assets to produce more sales. The analysis of Ford Motor Company’s operating efficiency indicates that this aspect needs to be improved as currently, the company uses its resources or inventory, not to their full extent.
Analysis of the Capital Structure of the Company
The capital structure of any firm can be analyzed with reference to leverage ratios. These ratios are used in order to determine whether a firm can address or pay for its long-term liabilities and what debt is owed to creditors (Lin et al., 2018). The ratios important for measuring the capital structure of Ford Motor Company in 2019 include the interest coverage ratio, debt to equity ratio, and debt to capital ratio along with cash flow coverage ratio.
For the analysis of the amount of money borrowed by Ford Motor Company, it is necessary to apply the debt to equity ratio and debt to capital ratio. The debt-to-equity ratio is determined with the help of dividing the total liabilities of a firm by shareholder equity (Stašević & Stavanović, 2019). For 2019, it was equal to (in millions) $225,307 / 33,230 = 6.8 (Ford Motor Company, 2019). Although the preferable ratio is 1-1.5, for capital-intensive industries, it is possible to observe ratios higher than 2. Therefore, one should state that Ford Motor Company and subsidiaries use significant debt financing as it is typical for the automotive industry.
To calculate the debt to capital ratio, it is necessary to divide interest-bearing debt along with short- and long-term liabilities (total debt) by the total debt along with shareholders’ equity. The balance sheet data need to be used to determine the measure (Epstein, 2014; Setiawanta et al., 2020). For the company under analysis, the ratio was equal to $225,307 / 258,537 = 0.87 (Ford Motor Company, 2019). This ratio is rather strong, indicating the company’s ability to effectively use financial leverage. The capital structure of Ford Motor Company and its subsidiaries can be regarded as satisfying and meeting the industry norms.
Analysis of the Profitability of the Company
The analysis of a firm’s profitability demonstrates how profitable a company is, and it should depend on calculating the following ratios: the net profit ratio, cash flow margin, gross profit, return on equity ratio, and others. For the purpose of analyzing the profitability of Ford Motor Company and its subsidiaries, it is necessary to apply the net profit ratio, cash flow margin, and return on equity ratio (Epstein, 2014). The net profit ratio is calculated when dividing net profit or income by revenue. For the company in 2019, it was equal to (in millions) $84,000 / 155,900 = 53% (Ford Motor Company, 2019). This ratio is regarded as high in comparison to other automobile manufacturers.
Cash flow margin is useful for determining how a firm can generate money from operations. To calculate this measure, it is necessary to divide cash flows produced by operating activities by a firm’s net sales (Deo, 2016; Epstein, 2014). For Ford Motor Company and subsidiaries, it was $17,639 / 155,900 = 11% in 2019 (Ford Motor Company, 2019). This measure indicates that only limited cash is available from the company’s sales, and the overall profitability is rather weak (Öztürk, 2015). However, these results should be examined in relation to other ratios used for determining profitability.
Return on equity ratio (ROE) is calculated by dividing net income by shareholders’ equity. For the company, this ratio was $84,000 / 33,230 = 253% (Ford Motor Company, 2019). The company’s ROE is very high, and this ratio in combination with other data being compared to competitors’ indicates that the profitability of Ford Motor Company and subsidiaries is high.
Recommendations for the Future Analysis of Ford Motor Company and Subsidiaries (Trend Analysis)
To understand what future changes can be observed in relation to Ford Motor Company’s profitability, capital structure, operating efficiency, and liquidity, it is also necessary to conduct a trend analysis. This approach to examining financial statements is based on comparing and analyzing the amounts presented in financial statements for different periods of time. Usually, annual financial statements provide the data for two or more years that can be compared by applying this horizontal analysis (Epstein, 2014; Kliestik et al., 2020). Focusing on remarkable changes in figures, it is possible to predict variations for the following years. The following recommendations for Ford Motor Company should be proposed:
- It is necessary to analyze changes in total revenues, operating income, and net income for 2017, 2018, and 2019 fiscal years to conclude regarding the variations in profitability and predict further trends.
- It is necessary to compare total assets, liabilities, and equity for the 2017, 2018, and 2019 fiscal years to conclude regarding the company’s leverage and solvency levels to forecast potential changes.
- It is necessary to analyze the net cash provided by operating activities, investing activities, and financing activities for the 2017, 2018, and 2019 fiscal years.
This analysis will help Ford Motor Company to predict how its revenues, net income, operating income, liabilities, and equity can potentially change in the next several years. As a result of such analysis, it is possible to identify certain trends in changes that can be addressed to achieve higher results for the future (Epstein, 2014). The provided recommendations accentuate the areas on which Ford Motor Company should focus to evaluate its strengths and weaknesses in addition to ratio analysis.
The financial statement analysis of Ford Motor Company and its subsidiaries indicates their current position in the market in 2019 to match the results with 2012 data. The conducted analysis of the financial state of Ford Motor Company for 2019 shows that the firm is in line with the industry and market trends. The company is characterized by the appropriate level of liquidity, by the comparably medium level of operating efficiency, by appropriate capital structure, and by high profitability. The recommendations for the future analysis of outcomes for the company underline the areas on which it is necessary to concentrate efforts when conducting trend analysis.
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