Financial analysis and management principles

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

5. Absorption Costing, ABC, Marginal Costing, CVP Analysis

Absorption costing encompasses a technique of including all costs incurred in the manufacturing of an item within its final retail price to the end consumer. Tutor2u defines the concept as "a method of costing that, in addition to direct costs, assigns all, or a proportion of, production overheads costs to cost units by means of one or a number of overhead absorption rates." An example of how Ford Motors Corp. uses this technique is given by the costs incurred in its transportation of its engines and other car parts from one location to the other. These costs are indirect and variable and other costing techniques do not include them in the final price. However, through absorption costing, the financial managers at the automobile manufacturer do include these overheads in the unitary costs of their products (Berry, 1999).

The Activity-Based Process Costing technique is an alternative accounting method, relative to the classic approach which places the satisfied and loyal customer at the core of corporate success. ABC on the other hand assesses corporate success in terms of activities conducted and the costs and numbers of transactions for these activities. It as such helps to better assess organizational performances and improve shareholder value (12 Manage, 2009). Ford has historically stayed away from ABC as their emphasis was placed on more traditional approaches. Had the organization employed the techniques of activity-based costing, they would have realized the need to change their approach and had started manufacturing small size and fuel efficient engines, as most of the customers were requiring these items. "If Ford [...] had used activity-based costing, they would have realized early on the utter futility of their competitive blitzes of the past few years, which offered new-car buyers spectacular discounts and hefty rewards" (Drucker, 2003).

Unlike absorption costing, marginal costing uses the traditional division into direct, indirect, fixed and variable costs. The accounting method sees that the final marginal cost of a product will be calculated by summing up the direct costs of labor, the direct costs of materials, the direct expenses and the variable overheads (Brown). The applications of marginal costing revealed that Ford was able to support a price advantage relative to General Motors and Chrysler due to its "intensive use of robotics, which tempered the cost effect on Ford of higher union wage rates" (Weisman, 2007).

The cost/volume/profit analysis is an extremely useful financial tool that will allow managers to make the best informed decisions. The analysis shows how profits will change when modifications occur in the volume of units sold or in the costs incurred in the manufacturing of the respective items. The most common application of the CVP is the breakeven analysis. Throughout the past few years, Ford has not been able to sell the required units of vehicles in order to break even. Foremost, due to an emphasis on fuel-efficient cars in the detriment of trucks, an unstable oil industry across the globe, the increasing prices of metals and other commodities, as well as the deteriorating economy, the Ford officials stated that 2009 is unlikely to brink positive profits. The company will however strive to reach its break even point in order to ensure a relative stability within the industry and market. In achieving this desiderate, they will increase volume production of their small and compact vehicles, such as the Ford Focus or the Ford Fiesta and will decrease the production of trucks and sports utility vehicles. "Unless there is a fairly rapid turnaround in U.S. business conditions, which we are not anticipating, it now looks like it will take longer than expected to achieve our North American Automotive profitability goal. Overall, we expect to be about break-even companywide in 2009 - with continued strong results in Europe and South America" (Alan Mulally, CEO of Ford, quoted in an article by Michelle Krebs, 2008).

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).