In this paper, we are going to studying Ford Motor Company and the changes that are occurring. This will be accomplished by focusing on: the pre-tax operating profits, key financial ratios, strategies to improve performance and how the company's refusal of bailout funds may have impacted their earnings. Once this occurs, is when we determine if the company is a good long term buy.
Ford Motor Company
Over the last several years, Ford Motor Company has been through a tremendous amount of challenges. This is because they were adversely impacted by the financial crisis and consumers switching to fuel efficient vehicles. Despite these issues, the firm has continued to adapt and become stronger. However, there are renewed worries that a secondary slowdown in consumer spending could adversely impact the automaker. To fully understand what is happening there will be a focus on the pre-tax operating profits, key financial ratios, strategies to improve performance and how the company's refusal of bailout funds may have impacted their results. Together, these different elements will highlight the current fiscal state of Ford. (Hiraide, 2012)
Based on the most recent quarter pre-tax operating profit, project the profit for the next four (4) quarters assuming that the U.S. economy stays the same as today, declines into a recession and modestly improves. Explain the assumptions made to support your calculations.
If Ford's operating profits remain the same over the next four quarters, they will be down. This means that these figures will come in around $3.63 billion for the first half of the year. Evidence of this can be seen in the below table which is comparing the pre-tax operating profit for the first half of 2012 with the same period in 2011. ("2011 Annual Report," 2012) ("Ford Motor Company 10Q," 2012)
Ford's Pre-Tax Operating Profits for the First Half of 2012 versus 2011
Year
Pre-Tax Operating Profit
2011
$5.32 billion
2012
$3.66 billion
("Ford Motor Company 10Q," 2012)
These figures are showing how the operating profits will more than likely be around $3.60 billion for each half of the year ($7.2 annually). Given that sales have been improving, there is the possibility that these numbers could come in around $8.2 billion. These assumptions are based on combining the pre-tax operating profits together. Then comparing the results with similar periods when the economy was slower (i.e. 2009 to 2010). ("2011 Annual Report," 2012) ("Ford Motor Company 10Q," 2012)
If the economy enters another recession, there is a possibility that these figures could decline to between $6 billion and $7 billion. These assumptions are based on looking at the annual report and studying where these figures were in 2010 (which is $8.30 billion). Since there is a slowdown, these numbers will more than likely decline even further. This is why the range of $6 billion to $7 billion was chosen. ("2011 Annual Report," 2012)
In the event that the economy modestly improves, there is the potential for an increase in pre-tax operating profits. This means that these figures will more than likely come in around $8.96 billion. This was determined by comparing the results for 2011 with 2010 and subtracting the difference. These figures were divided in half to reflect a more modest recovery (which is approximately $200 million). ("2011 Annual Report," 2012)
Discuss three (3) key financial ratios that you would analyze to determine whether or not Ford would be a wise investment opportunity. Explain your rationale.
The three key ratios that would be analyzed include: the forward price earnings (PE), return on equity and current ratios. The forward price earnings ratio is looking at how over or undervalued the stock is in comparison with the historical mean. It is currently sitting at 7.10. This is a sign that the price is oversold with the ability to see an increase in value. (Hiraide, 2012) ("Ford Motor Company," 2012) ("2011 Annual Report," 2012)
The return on equity is determining how effectively the company is taking the working capital from investors and utilizing it to increase profit margins. This is showing an increase of 157.85%. The high number is indicating, how the company is providing investors with a large return. While the current ratio is 1.68, which is illustrating that the firm has more than enough liquidity to meet its financial obligations. (Hiraide, 2012) ("Ford Motor Company," 2012) ("2011 Annual Report," 2012)
These figures are showing how Ford is a good long-term investment opportunity. This is because they have been focused on increasing the total return for shareholders, there are tremendous amounts of liquidity and it is oversold in comparison with historical averages. In the long-term, these factors will help the company to see upward price appreciation and an increase in the dividend. However, everyone should understand that there are times when the company will have uneven results. This is because the firm can be affected by sudden changes in the economy or the auto industry. In the short to medium term, this may create some volatility. The rationale behind selecting the three ratios is they can provide specific insights about valuations, debt levels and investor returns. ("Ford Motor Company," 2012) (Hiraide, 2012) ("2011 Annual Report," 2012)
Based on your analysis of the key ratios, describe the strategies you would recommend to Ford's management team to improve its financial performance. Explain your rationale.
The most important strategy that should be utilized is the management needs to effectively control various resources. This is challenging, because the entire industry has become increasingly competitive. As the profit margins rise, there will be demands for higher forms of compensation and other benefits. At the same time, personnel will not critically monitor certain activities in key markets. In the future, this could have an adverse impact on Ford's ability to adjust with changes in fuel prices, labor costs and customer demand. (Sethi, 2009)
In the last year, the company has been seeing loses in several areas to include: foreign currency translation and derivative instruments (which totaled $407 million). The below table is highlighting the decline in these areas. (Sethi, 2009) ("Ford Motor Company 10Q," 2012)
Ford's Foreign Currency Translations and Derivative Instruments from 2011 to 2012 (First Half)
Year
Category
Amount
2012
Foreign Currency Translation
-$255 million
2012
Derivative Instruments
$-152 million
("Ford Motor Company 10Q," 2012)
These figures are showing how managers must focus on mitigating all losses. The fact that this is occurring is underscoring the need to remain vigilant. (Sethi, 2009)
Evaluate how the refusal of the federal government's bailout fund may have impacted Ford's financial performance negatively and positively.
The refusal to accept funds from the federal government hurt the company's ability to reduce its debt load. This would have been a good environment for Ford to achieve these objectives. In the future, this helps to increase their profit margins even more. The way that this may have negatively impacted their performance is to damage the image of the company. While at the same time, they are taking funds which are not necessary (creating the possibility of wasteful spending). However, by refusing assistance, the company could not quickly reduce its debt load and retool. (Yandle, 2009)
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