Ford Motor Company cash flow statement

Introduction
The cash flow statement is the third major financial statement that is mandated by the Securities Exchange Commission. Every public company must produce a statement of cash flows that highlights the acquisition and disposition of cash, for operations, investment and finance. The cash flow statement can lend context to the income statement and balance sheet both, which makes it a valuable statement to examine. One key difference between the cash flow statement and the other two is that there are not many ratios with which to perform analysis. Analyzing the cash flow statement is a little bit more intuitive.
As with the other statements, the cash flow statement is produced to help provide transparency to an organization’s stakeholders, and assist with evaluating the financial condition of the company. There are key financial stakeholders such as the shareholders and the creditors, but many other stakeholders as well such as customers, employees and management, competitors and potential investors as well as regulators.
Three Parts of the Cash Flow Statement
The cash flow statement breaks down a company into three types of activities. The operating activities are just that – the operations of the company. This section of the cash flow statement can provide important context to the income statement in particular. For example, the income statement can show that the company is turning a profit, but some of that profit (or loss) can be non-cash items. The operating cash flows breakdown can help because it removes the non-cash items from the income statement. Thus, expenses such as depreciation are removed, as well as non-cash writedowns that might occur. There are many instances where a company’s net income can vary considerably from year to year but the operating cash flows do not. In such a situation, the company’s operations haven’t changed much and the net income swings are due to non-cash items.
The second part of the cash flow statement is the cash from investing activities. Companies can invest not only in securities but in building out infrastructure. Investing activities will typically reflect these flows. In many cases, the cash flow will occur in one year, but the investment might be amortized or depreciated on the income statement over the course of many years. But spending a lot of money today in order to earn profit tomorrow is still spending cash, and stakeholders still need to understand the cash position of the company, so it is valuable to break out these particular flows.
The third part of the cash flow statement is the cash flow from financing activiites. Financing activities are the acquisition and disposition of debt, issuing equity, paying dividends and buying back stock. Often, one will see a large acquisition of debt in this section, to go along with a large investment in something in the investing activities section. One of the interesting aspects of this part of the cash flow statement is the stock buyback line item. Sometimes, a company’s share price goes up even when its financial performance is not great, and that can occur if it buys back enough of its own shares, which creates demand. This can be quite valuable for investors to understand – why the stock price is going up, and that it is not actually related to the company’s performance.
Taken together, these three sections provide a substantial amount of information relating to the company’s cash flow. An analyst can work through the cash flow statement, using it to provide context to the other financial statements, but also to examine issues such as solvency and liquidity, and evaluating the operations of the company as well.
Analysis of Ford Motor Company Cash Flow Statement
The income statement for Ford showed substantial variation in net income for the 2010-2012 period, which means that there is some value in analyzing the cash flows from operations, which is a better signal of operational success than the income statement in years when there is substantial fluctuation in non-cash items. Unfortunately, the cash flow statement in Ford’s 2012 Annual Report is a disappointment in this regard.
There is a line item for cash from operations, but there is no breakdown, so no context provided. The line item shows that cash from operations has declined over the three years for Ford, which is not a positive sign. However, we know from the income statement that there is a depreciation expense, so not having the cash flow from operations broken out is bad form on the part of Ford. Investopedia (2018) notes that cash flow from operations is made up of, at the minimum, net income, depreciation, taxes and change in working capital. All of these are important, so that they are not contained on this statement is both irregular and worrying. One of the most important reasons for producing financial statements is to provide transparency for investors, regulators and other stakeholders, and so when a company withholds information in such a glaring manner, structuring their statement out of line with the norms, it raises a red flag.
The next section, cash flow from investing activities, tells a lot about Ford’s operations. First, the company invests $4-$5 billion per year in capital expenditures to build out the company. It purchases and sells a substantial amounts of securities, partially relating to the company’s finance arm. Substantial swings in cash flows can result from these transactions. Ford also sells and buys operating leases and other financial assets, relating to how it structures sales to dealers, for example. These transactions can also have a significant impact on the company’s cash flow for the year. Combined, these areas of the investing activities are the most important parts of Ford’s cash flow statement.
In order to properly understand these, it is necessary to understand the structure of Ford’s business. These categories are probably similar for most automakers, but not for other companies, so would only be comparable in terms of the industry peers. Ford provides vehicles to dealers, and there are significant credit transactions for this, and Ford also provides financing that dealers can then sell to customers to help them buy Ford vehicles. This forms another component of Ford’s investing activities. Ford had positive cash flow contribution from investing activities in 2010, but this was negative in 2011 and strongly negative in 2012.
The third and final section of the statement of cash flows is the cash flows from financing activities. Ford paid dividends in 2012, something it had not done in the previous two years. It has a lot of debt, and cycles this debt, so in each of the past three years there’s been significant issuances of debt and repayments of debt. These do not directly offset, but rather they vary with the needs of the company. In 2010, there as a payment to work benefits for over $7 billion that was not in the other years. These sorts of one-off payments can significant impact cash flow, so it is important for investors to know about them, and that they are one-off transactions.
Conclusions
Ford’s statement of cash flows provides an overview into the various, and sometimes complex financial transactions that are at the core of Ford’s business. The company’s business is clearly more than just making cars – its dealer arrangements and finance arm form a significant part of the company’s financial condition. For stakeholders to understand Ford’s financial health, digging into the notes to find out more about these arrangements is important. This is probably the biggest takeaway. While it is annoying that the cash flow from operations receives no elaboration, this may also signal in its own way that Ford doesn’t view its automaking as the most important thing in terms of its business – the financial side is given much more time and space on the cash flow statement.
The cash flow statement provides valuable context to the other financial statements as well. The income statement shows substantial fluctuations in net income, and the cash flow statement does show that the company is declining in terms of its operations, but that net income is more related to the financial transactions. All told, the statement of cash flows is the third piece in the puzzle of financial statements, and taken with the other balance sheet and the income statement, it provides valuable insight into the financial condition of Ford Motor Company.



References

Ford Motor Company 2012 Annual Report. In possession of the author

Investopedia (2018) What is cash flow from operating activities. Investopedia. Retrieved July 1, 2018 from https://www.investopedia.com/terms/c/cash-flow-from-operating-activities.asp

Morningstar (2015) The statement of cash flows. Morningstar. Retrieved July 1, 2018 from http://news.morningstar.com/classroom2/course.asp?docId=142913&page=4

Way, J. (2018) What is the importance of a company’s financial statements. Houston Chronicle Retrieved July 1, 2018 from http://smallbusiness.chron.com/importance-companys-financial-statements-21332.html