Ford Motor Company Income Statement analysis

Purpose of Income Statement
The purpose of an income statement is to convey to interested stakeholders the level of income that the company has. In general, financial statements are used to provide a consistent method of presenting financial information that is used by creditors and investors to learn more about the financial health of the company. The income statement focuses on the revenues and costs that the company has in its operations, telling the reader about the company’s ability to earn a profit (Accounting Tools, 2018).
The income statement can be evaluated on its own, but because it covers a particular time period, it also has value in conveying information across multiple time periods. A growing business, for example, will have that growth illustrated in its income statement, as its income and costs will grow over time. The income statement is therefore a valuable tool for regulators as well – it is a key source of information that could highlight accounting fraud, because there are many components of the income statement that are used by tax and regulatory authorities to determine the financial health and tax burden of the company.
Assessing an Income Statement
There are a number of different ways to analyze an income statement. Often, such analysis will be done over the course of multiple time periods, as this helps to better assess trends in a company’s income or its profitability. The first means is by compiling a vertical income statement, which compares each line item to the revenue. This way, even when revenue is growing, the analyst can easily see whether or not the costs are growing – if they are growing faster than the revenues or slower, for example.
The horizontal income statement shows something similar, but rendered differently. With the horizontal income statement, there is a base year, and the subsequent years can be evaluated against the base year. For example, it can show that in the past five years, revenue increased 32%, but operating costs increased 38%, which would tell an analyst that costs are growing faster than revenues, on aggregate, over the course of the past five years. The horizontal analysis can smooth out some of the year-over-year changes.
Another means by which income statement information is used by relevant stakeholders is via ratio analysis. This form of analysis distills the financial information into a set of ratios, which can then be compared against the company’s past ratios, or the ratios of other companies in the industry. A ratio analysis can be particularly valuable to investigate two companies that are different sizes, and might otherwise be difficult to compare.
Assessing Ford’s 2012 Income Statement
Income statement and financial ratios can also be assessed versus industry average ratios, and this is possible for Ford as well. The website CSI Market (2018) publishes historical ratios for several industries, and therefore can be used as a source to compare these figures to. For example, the profitability ratios:

Profitability Ratios
Ford
Industry
Gross Margin
4.68%
19.14%

Operating Margin
5.75%
5.32%

Net Margin
4.21%
2.94%



Ford’s figures are skewed by interest income that the company earned in the year. Its gross margin is clearly less than the industry norm, but with the interest income it has a higher operating and net margin, than the industry norm, and the operating margin is higher than the gross margin, which is quite unusual. What this tells stakeholders, however, is that the company’s automotive business is not particularly strong, the low gross margin being evidence of that, but that it has been able to make up for that in other areas.

Other Ratios
Some other income statement ratios include the returns that the company earns.

Investment Returns
Ford
Industry

Return on Total Assets
2.97%
3.52%

Return on Equity
35.40%
20.30%



Ford’s investment returns are calculated on the basis of the net income, and the balance sheet items of the total assets and the equity. In this case, we learned from our analysis of the balance sheet that Ford has higher debt than most companies in the industry – it’s debt to equity ratio was 10.89 compared with the industry average of 2.05. This means that Ford’s balance sheet will have relatively little equity. So it is not surprising at all that Ford has a higher return on equity than most of the other companies in the industry. It has a better net margin than the industry average, and less equity than the average, and that combines to give it a very high ROE.
The ROA figure is probably more comparable, because many of Ford’s peers are roughly the same size, and they tend to have the same high level of fixed assets involved in automobile production. Ford’s ROA is slightly lower than the industry average, which indicates that they are industry players that are more efficient than Ford at converting their physical assets into profits, at least for 2012.

Conclusions
The income statement can be a powerful tool that helps investors, creditors and other stakeholders more accurately evaluate the financial condition of a company. There are many key measures that are made using income statement metrics. It is important for any stakeholder to understand how to use the income statement, and the figures contained therein, to better understand the company’s finances. The income statement is a snapshot over a time period, so it is important to understand that comparing over time is a valuable way to look at this particular financial statement.
As always, it is also important to look at the notes to the financial statements, as they can sometimes contain valuable information about the company’s accounting policies. For example, the income statement can be influenced by the accounting policies that a company uses. This is valuable knowledge to have when comparing Ford against other companies in the industry, if they are using different accounting practices.

References

Accounting Tools (2018) The purpose of financial statements

Brenner, L. (2016) The purpose of the balance sheet and income statement. Houston Chronicle. http://smallbusiness.chron.com/purpose-balance-sheet-income-statement-61847.html

CSI Market (2018). Auto and truck manufacturers’ industry revenue growth rates. CSI Market. Retrieved June 26, 2018 from https://csimarket.com/Industry/industry_growth_rates.php?ind=404&hist=20

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