Financial analysis and management at Ford Motor Company

Financial Analysis and Management at Ford Motor Company

The contemporaneous society is currently struggling with the effects of the internationalized economic crisis. Emerged within the United States due to a multitude of causes, such as the real estate crisis, the aging of the population and the retirement of the baby boomers with the sky high healthcare costs, or the record high federal debt, the financial difficulties soon expanded and impacted several other countries. Within the United States, the effects included the loss of jobs, savings and the will to work. Some industries were less affected than the others. While healthcare is for instance less dependent on the economic status and demand for workforce still exists, the automobile industry was more sensitive. Thousands of jobs were lost as manufacturing plants closed down.

Once at the top on the list of American employers, the automobile industry is now facing severe challenges. The aim of this paper is to conduct a financial analysis of Ford Motors Corporation and assess the real status of the American automobile manufacturer. References will be made to the general financial status, as well as more specific issues. The primary source of information will be represented by organizational documents, retrieved from the organization's website. Some information are however undisclosed to the public or only limitedly addressed; ergo, the sources will be completed by secondary works, such as books or articles in magazines and specialized journals. Before commencing the assessment of the company's financial well-being it is crucial however to get an idea of the organizational background of Ford Motors Corp. Its financial statements and ratios will then be analyzed, alongside with its capital investment appraisal and the operations of financing the business. The paper will come to end with a section on concluding remarks.

2. Company Background

Ford Motor Company was established in 1903 in Dearborn, Michigan by founder Henry Ford and made history through the introduction of product lines in the early twentieth century (Hoovers, 2009). Its main operations were historically focused on the production and sale of automobiles, but in more recent periods, they also begun to offer financial services to the customers who needed support in purchasing their desired Ford vehicle. The most notable product lines include the Ford Mustang and the classic Ford Mondeo, or the more recently popular Ford Focus and Ford Fiesta. The strategy at the core of Ford' operations has been an aggressive one, with the company purchasing participations in several companies, including Japanese group Mazda (partly) or the Swedish Volvo Cars (fully owned). As of 2008, Ford had a market capitalization of $4,061,054,410 and employed a total of 245,000 individuals worldwide; out of these, 87,700 are employed only in the United States (Zeno Bank, 2009).

More than half of the automobile sales Ford registered throughout one year are achieved outside the United States. Also, much of the manufacturing operations were conducted outside the country, with the organization being severely criticized for outsourcing American jobs. Nowadays however, they are beginning to close down some of their plants in an attempt to reduce costs and ensure the company's future sustainability.

Ford remains one of the top leaders of the international automobile industry, but it has lost some of its supremacy. The Ford officials found it difficult to renounce the billion dollar technologies they had integrated in the manufacturing of their large and luxurious vehicles when these were no longer demanded by the public. As a result of this failure to adapt to market conditions, the American customers turned their attention to the Japanese automobiles, which were more environment and pocked friendly. They consumed less fuels, generated lower levels of pollution and were cheaper to upkeep. Ford is currently striving to integrate the new consumer demands into their models, but major improvements have yet to be achieved, even more so when considering the internationalized financial crisis which further pressures the industry.

3. Analysis of Financial Statements

The Ford financial statements are prepared in accordance with the requirements of the Securities and Exchange Commission and allow easy readability and comparison in time and across industries and companies. They consider the period of twelve months and the fiscal year ends on the 31st of December, each year.

The income statement reveals fluctuating revenues throughout the past five years, with the highest gains being achieved in 2005 ($176,835.0 million) and the lowest revenues being registered in 2008 ($146,277.0 million). The situation is also similar in terms of gross profits, with the highest value having been registered in 2004 ($28,090.0 million) and the lowest in 2008 ($9,492.0 million). Despite the positive values of revenues and gross profits, the situation of the operating income is less encouraging, with the values being negative. In 2004 for instance, the operating revenues totaled $2,866.0 million; by 2006, they had dropped to a negative $16,973.0 million, to reach a negative $13,812.0 million in 2008. The net income has followed the same descendant trend, with the valued decreasing from $3,038.0 million in 2004 to -14,672.0 million in 2008 (Money Central, 2009).

The balance sheet reveals fluctuating values of the cash and short-term investments, with the highest value being registered in 2007 ($35,283.0 million). The values in 2004 and 2008 are similar, with cash and short-term investments amounting to $22,831.0 million in 2004 and $22,049.0 million in 2008. The total net receivables have also registered fluctuating values, with $115,458.0 million in 2004, $117,263.0 million in 2007 and $99,557.0 million in 2008. Ford's total assets have followed a similar trend; the 2004 total of $295,487.0 million had transformed into $218,328.0 million by 2008. The total liabilities decreased from $278,050.0 million in 2004 to $235,639.0 million in 2008. The most dramatic change occurred in terms of total equity, which decreased from a 2004 total of $17,437.0 million to a negative $17,311.0 million (Money Central, 2009).

Finally, the cash flow statements revel similar fluctuating trends from one year to the next, but a generalized descendant trend when longer time periods are observed. The cash from operating activities decreased from $21,973.0 million in 2004 to a negative 179.0 million in 2008. On the other hand, the negative cash from investing activities has more than halved its negative value, from -7,410.0 million in 2004 to -3,143.0 million in 2008. However it fluctuated greatly across the five years under analysis, the cash from financing activities has maintained relatively constant in 2008 relative to 2004; it had values of -9,912.0 million in 2004 and -9,104.0 million in 2008 (Money Central, 2009).

4. Financial Ratios

An analysis of Ford's financial ratios is relevant in the context in which they can be analyzed against the industry's average. The following table presents several financial ratios for Ford, as well as the industry average and the observations which are imposed to explain the figures:

Ratio

Ford

Industry Average

Observations

Sales

The growth rate reveals that the overall industry has been negatively affected, but that Ford is more sensitive to the challenges and less able to increase sales than other organizations

Gross Margin

Ford retains less for each dollar spent than other companies in the automobile industry

Operating Margin

The company has a less effective pricing strategy than the competition and is less able to honor its variable costs

Net Profit Margin

Ford uses its revenues to pay debts, rather than make profits

Return on Assets

Ford's management is less able to generate revenues from its assets that the other players in the automobile industry

Return on Investment

The investments made by Ford are less profitable that the investments made by its competitors

Asset Turnover

Ford is less able to generate sales from its assets that other companies in the industry

Adapted from the Reuters Website, 2009

6. Capital Investment Appraisal

Ford Motors Corp. generally desires to invest its resources in projects that will generate a satisfactory return on investment and will increase shareholder value. However, since its resources are limited, the financial team has to make use of several techniques of assessing the available opportunities and their expected outcome. Such a technique is called investment capital appraisal, more commonly known as capital budgeting (Investopedia, 2009).

Additional information on the actual applications of capital budgeting by the financial managers at Ford are difficult to retrieve as the information on their specific investments are undisclosed to the public. However, it is highly probable that Ford will not engage in purchasing a new plant or a new manufacturing technology without first knowing how this would benefit the organizations. Questions to be answered refer to the costs of the investments, the number of new automobiles the new plant (or technology) would be able to produce or the cash flows the project would generate. In answering the questions, the financial specialists at Ford would calculate at least the net present value (NPV), the payback period (PP) and the return on investment - ROI (Sukmanowsky, 2008).

The NPV represents the difference between the present value of the cash inflows and the present value of the cash outflows. It also deals with the present and future value of money, using inflation and other adjustments. The payback period is measured by dividing the cost of the project by the annual cash inflows and it strives to identify the time it will take for the investment made to become profitable. Finally, the return on investment takes into account the costs and gains of the investment and assesses its future profitability (Investopedia, 2009).

7. Financing the Business

The Ford Motors Corp. mainly retrieves its financial resources for its own operations. Otherwise put, they keep reinvesting the profits at the end of the year to sustain new endeavors, which in turn generate profits. Part of these profits will be used to pay the dividends to the shareholders, the employee wages or the commodities, whilst another part will be allocated for future endeavors, such as the purchase of a new technology or the opening of a new plant. Most of Ford's revenues come from the sale of their automobiles throughout the world; the leader of the category is North America, with a 2007 average of 2,836,000 sold automobiles, followed by Europe with the sale of 1,918,000 vehicles and South America, with the sale of 436,000 cars (Ford 2007 Annual Report).

More recently however, the company has diversified its product and service offering, coming to retrieve financial benefits from its offering of purchasing services. Otherwise put, Ford begun to enlarge its chances of income (and as such sources of additional investments) by offering their customers financial services in purchasing the desired automobile. In 2007 for instance, the financial services retrieved revenues of $18.1 billion, a 7.7% increase relative to the $16.8 billion achieved throughout the previous fiscal year (Ford 2007 Annual Report).

Another means of financing their operations comes from the sale of corporate stocks. However, during the past years, the financing opportunities from this source became reduced due to a massive decrease in the company's share. The Ford stock is currently (Monday, March 9, 2009) being traded at a value of $1.78 on the New York Stock Exchange. Its highest value throughout the past year has been of $8.79 and its lowest value was of $1.01 (Market Watch, 2009).

Given the emergence of the economic crisis commenced throughout the second half of 2008, the United States Government became engaged in financial actions that would support the automobile industry in overcoming the effects of the economic difficulties. In this context then, Ford requested the federal institution that they open a stand-by credit line for Ford, in the maximum amount of $9 billion. This money would only be used if the market conditions become even more challenging and the company comes to face more severe risks (U.S. Senate Committee on Banking, Housing and Urban Affairs, 2008).

8. Conclusions

Today's business community is tormented by the effects of the internationalized economic crisis. This paper aimed to reveal the truth behind the rumors according to which Ford Motor Company was encountering severe financial challenges. In answering the question, several financial analyses were conducted, including a critical look at the organizations' financial statements (income statement, balance sheet and cash statements), as well as a comparative analysis of Ford and the industry through the lenses of several financial rations. Ford was also analyzed in terms of general financial practices, such as their implementation of ABC, or marginal costing, capital budgeting or the sources for financing their business. Sadly enough, the information retrieved from various sources comes to conclude that the initial thesis is correct and that the company is in fact dealing with severe financial challenges.