The balance sheet is one of the most important sections found in companies’ annual reports because it provides significant financial data that are helpful to conclude regarding an organization’s position in the industry. In order to understand the specifics of the financial health of Ford Motor Company in 2012, it is necessary to retrieve its annual report and focus on the balance sheet with reference to identifying critical financial ratios (Ford Motor Company, 2012). The aim of this paper is to explain the purpose of the balance sheet, analyze the details of Ford Motor Company’s balance sheet, and concentrate on the financial ratios to be able to compare them to the standards typical of the industry during the examined period.
Purpose of the Balance Sheet
A balance sheet is a financial statement, in which all the company’s assets, liabilities, and equity are listed depending on a certain period of time. Therefore, the purpose of a balance sheet is to present the financial status or position of a company depending on the items it possesses or resources it borrows or owes (Epstein, 2014). The financial status is reported for a certain point in time, and it can change (Kliestik et al., 2020). The examination of this financial statement with reference to any company is important in order to understand what status it has at a specific point in time, and this information is illustrative to support the analysis of available assets, investments, equity, and debts.
What is more important is the possibility to calculate financial ratios with references to figures taken from the balance sheet. When referring to ratios, it is possible to represent the level of a firm’s financial health. Using a balance sheet, stakeholders can not only assess the financial position of a firm but also to evaluate the effectiveness of using and combining assets in order to decrease debts (Epstein, 2014; Svabova & Durica, 2019). Furthermore, this financial statement provides significant information and critically important facts for banks and investors to assist them in deciding on offering loans or funding.
Analysis of the Balance Sheet and Financial Ratios
In order to be able to effectively analyze the information included in the balance sheet, it is necessary to calculate financial ratios because a simple review of figures does not provide the important data on the financial status. There are four main types of financial ratios to focus on for this analysis: profitability ratios, liquidity ratios, leverage ratios, and efficiency ratios (Epstein, 2014). Profitability ratios are critical to determine to state what actual profits the company receives depending on its operations. Liquidity ratios help to determine how successfully a company can respond to its short-term obligations with reference to the available cash and assets. Leverage ratios assist in stating a company’s dependence on debts and its possibility to easily address them (Epstein, 2014; Kliestik et al., 2020). For the purpose of the analysis of the balance sheet for Ford Motor Company, it is critical to concentrate on ratios, which calculation is based on the information provided in balance sheets (Ford Motor Company, 2012). These ratios include current ratio (liquidity ratio), quick ratio (liquidity ratio), and debt ratio (leverage ratio).
Current ratio as the ability to address short-term obligations is calculated with the help of dividing current assets of a firm by its current liabilities. For Ford Motor Company, the current ratio in 2012 was equal to $190,554/174,243 = 1.09 (Ford Motor Company, 2012). This current ratio is 1:1 that can be considered as rather low, but in contrast to the industry standards, the ratio is similar to other companies, and this figure is typical for the automobile manufacturing industry.
Quick ratio is similar to current ratio as it is another liquidity ratio that can be calculated with the help of figures provided in the balance sheet of Ford Motor Company. This ratio can be calculated when dividing liquid current assets (including cash, investments, receivable accounts) by total current liabilities (Epstein, 2014). When referring to the data offered in the examined balance sheet, quick ratio equals $183,192/174,243 = 1.05. This ratio indicates the possibility to quickly turn assets into cash in contrast to current liabilities (Ford Motor Company, 2012). The determined ratio is typical of the industry in which Ford Motor Company operates, and it shows limited possibilities for the company to turn assets into cash as quickly as it can be required.
Debt ratio as the leverage ratio helps to determine the percentage of total assets of the firm that are owed to the company’s investors and creditors. The formula that is applied to calculate this ratio is the following one: total liabilities should be divided by total assets (Epstein, 2014). When referring to the information presented in Ford Motor Company’s balance sheet, it is possible to determine the following numbers: $174,243/190,554 = 0.9 (Ford Motor Company, 2012). This debt ratio is rather high that indicates that Ford Motor Company can experience certain difficulties with maintaining its financial leverage. The reason is that high debt ratios show the impossibility of a company to generate the enough amount of cash to address its debts. The comparison of the debt ratios in the automotive industry points to the fact that Ford Motor Company’s ratio is rather higher. The goal of competitors is to achieve the debt ratio that is lower than 0.6 in order to ensure that a firm can easily address its debts with reference to owned assets.
The ratio analysis has been conducted based on the data provided in Ford Motor Company’s balance sheet. Thus, it is important to note that the ratio analysis is an effective technique and approach to evaluate the financial position of any company with a focus on the information that is offered in annual reports. The calculation of some liquidity and leverage financial ratios for Ford Motor Company has allowed for concluding regarding the company’s stability in the industry in comparison to other competitors. From this perspective, the data offered in the consolidated balance sheet of the company are important to be examined and evaluated by investors and other stakeholders to receive a clear picture regarding Ford Motor Company’s performance and profitability in financial terms.
If a company’s ratios are worse in comparison to the ratios determined for the industry, it is possible to speak about the firm’s failure in competing with rivals. More attention should be paid to stabilizing the financial position of a company. When referring to the situation with Ford Motor Company, it is important to note that the firm competes effectively in the industry in spite of a rather high leverage (debt) ratio.
- Epstein, L. (2014). Financial decision making: An introduction to financial reports. Bridgepoint Education, Inc.
- Ford Motor Company. (2012). Profitable growth for all: Ford Motor Company 2012 Annual report.
- Kliestik, T., Valaskova, K., Lazaroiu, G., Kovacova, M., & Vrbka, J. (2020). Remaining financially healthy and competitive: The role of financial predictors. Journal of Competitiveness, 12(1), 74-92.
- Svabova, L., & Durica, M. (2019). Being an outlier: A company non-prosperity sign? Equilibrium. Quarterly Journal of Economics and Economic Policy, 14(2), 359-375.