Financial Ratio Analysis

Financial Ratio Analysis Abdulla ….. 24 March 2019 Master’s in Business Administration Financial Ratio Analysis of Ford Motor Company Ford Motors Company is ranked No. 10 amongst the Fortune 500 companies in the world and is one of the leading automobile manufacturer based in Michigan, USA. It was founded by Henry Ford who is regarded as the father of automobile industry. Ford Motor Company’s 2018 consolidated revenue is US$ 148,294 Mn and its net profit is US$ 3,677 Mn. The company has two main business segments- Automobile and Financial Services. Automobile however is the biggest segment. The company’s total asset base is US$256,540 Mn. (www. corporate.ford.com) Analysis of major Ratios Ratio analysis is a quantitative analysis of a company's financial statements namely the Balance Sheet and the income statement. Ratio analysis is mainly used to evaluate various aspects of a company's financial and operating performance such as the company’s efficiency, liquidity, profitability, and solvency. Ratio analysis helps us to gauge the performance of the company vis-à-vis competitors. It helps us to measure their relative strength within the market. Liquidity ratio indicates short term liquidity of business and its ability to make short term payments. There are two main liquidity ratios for a company, namely Current ratio, and Quick Ratio. Current Ratio stands for Current Assets divided by the Current Liabilities. This ratio indicates the short-term solvency of the company and its ability to repay the business obligations for next 12 months. An ideal current ratio stands at 2. In case of Ford Motor Company, the Current Ratio is 1.2 which looks decent and is considered having average liquidity. Quick Ratio stands for Quick Assets divided by Current Liabilities. Quick Assets consists all the current assets except Inventory. The purpose of this ratio is to take those current assets which can be realized into cash immediately and hence inventory is not included. This ratio indicates very short-term liquidity situation of the company and the ideal quick ratio is 1. In case of Ford Motor Company, the quick ratio is 1.08 which is considered good. Solvency ratio is used to measure a company’s ability to meet the debt and other obligations. The ratio indicates whether a company has sufficient cash flow to meet its short-term and long-term debts and liabilities. The majorly used solvency ratio is Debt to Equity Ratio. This represents Total Debt of the company divided by Total Shareholder’s equity. An ideal debt equity ratio is 2 and the lower ratio is considered better. In case of Ford Motor Company, the Debt to Equity Ratio is 2.80 which is considered high and represents a risk of default in meeting its debt repayment obligation. The efficiency ratios are generally used to analyze how a company is utilizing its assets and liabilities internally and is also based on sales. An efficiency ratio usually calculates the turnover of receivables, payables, usage of company’s inventory and fixed assets. Inventory Turnover ratio is calculated as Total Cost of Goods sold divided by Average Inventory. The ratio indicates how many number of times, the company’s stock turns within a year. The higher inventory turnover indicates that the company is very efficient and there is less closing inventory. In case of ford motor company, the inventory turnover ratio is 12.17 times which is very good. This ratio can be interpreted in number of days as well by dividing 365. It comes to 30 days. Receivables turnover ratio is calculated as Total Sales divided by Average receivables. The ratio indicates how many number of times, the company’s receivables convert into cash turns within a year. The higher Receivables turnover indicates that the company is very efficient and there is less delay in getting payments from credit sales. The receivables turnover ratio is 13.61 times or 26.8 days which is very good. Total Assets turnover ratio is calculated as Total Sales divided by Average total assets. The ratio indicates how efficient is the company using its assets as against its total turnover. In case of ford motor company, the total assets turnover ratio is 0.58 times which means that compared to its sales, the total assets are much larger. The reason for this could be because of the capital-intensive nature of automobile business which demands heavy investments in fixed assets. Profitability ratios are used to assess a company’s ability to generate earnings compared to its expenses and costs. These ratios indicate how much profits the company is earning vis-à-vis its competition. Usually, the higher profitability ratio is considered the better. Profit margin ratio is calculated as Net Profit divided by Total Sales. This ratio is also known as net profit margin and indicates the final profit percentage earned by the company. In the case of Ford Motor Company, the Net margin ratio is 2.48%. The net margin differs from industry to industry and in the USA automobile industry, the net margin is usually in the range of 4-4.5% and hence the margin looks low comparatively for Ford Motor. Return on Assets Ratio is calculated as Net profit divided by total assets. The ratio indicates the total returns on invested assets also known as Return on Investment. This ratio shows the total returns a business is providing against all the investments, The Return on Assets is 2.48% which is decent and comparable to the equity returns in the USA stock markets. (Stephen, 2017, p.20) Analysis of Company’s sustainability program Ford is currently undertaking many social and commercial sustainability programs like Conclusion Ratio analysis is a very good tool to compare any company’s financials. The liquidity, profitability, efficiency, and solvency ratios help in determining the current strengths and weaknesses of a company. In case of Ford Motor Company, the majority of ratios look very healthy especially the liquidity and efficiency ratios, however the company’s debt-equity ratio looks very high and could lead to problems in debt repayment. References 1) Stephen A. Ross (2016). Corporate Finance (11th ed.): McGraw-Hill 2) Ford Motor Company Annual Report 2018. Retrieved from: - https://www.sec.gov/Archives/edgar/data/37996/000003799619000012/f1231201810-k.htm#sADE271A8908852C282CD54055B8643BA INANCIAL RATIO ANALYSIS 5 Financial Ratio Analysis 1