KENNETH C HOLMES

APPLIES MANAGEMENT ACCOUNTING

PROFESSOR: JASON CADE

JANUARY 19, 2015

PHASE 1: INDIVIDUAL PROJECT 2

MEMO

To: Mark Fields President, CEO and Director of Ford Motor Company

RE: Ford’s performance based on specific ratios

As one of Ford’s Financial Analyst it is my responsibility to evaluate the productivity and profitability of the firm. This memo is the analysis and evaluation of the last three years using various key financial ratios, and Ford’s ranking in the U.S. The following is my analysis of 2013, 2012 and 2011 figures, and my suggestions for improvement.

Financial ratios calculated and trend analysis for three years:

Return on assets: net income/total assets

2013: $7,155.00/$202,026.00 = .035 or 3.5

2012: $5,665.00/$190,554.00 = .029 or 2.9

2011: $20,213.00/$178,348.00 = .113 or 11.3

For the three years including: 2011, Ford earned 11.3 cents on every dollar of assets; 2012, Ford earned 2.9 cents on every dollar of assets; and for 2013, Ford earned 3.5 cents on every dollar of assets. 2011 proved a highly profitable year, but for 2011 and 2012 the ROA dropped significantly. The ROA measures the efficiency at which assets are used to generate income, the higher the ROA the more profitable the firm. The figures show a weak profitability, but the trend shows improvement incrementally. It is not uncommon for the automotive industry to have a low ROA, the industry is asset-insensitive because it requires expensive plant and equipment to generate income.

Return on equity: net profit after taxes/shareholder’s equity

2013: $7,148.00/$26,383.00 = .271 or 27.1%

2012: $5,664.00/$15,947.00 = .355 or 35.5%

2011: $20,222.00/$15,028.00 = 1.346 or 134.6%

For the three years including: 2011, Ford generated 134.6% of its income from new investments; 2012, Ford generated 35.5% of it income from new investments; and for 2013, Ford generated 27.1% of its income from new investments. As a general rule, the higher the ROE, the more efficient the company is at generating income from new investments, but it is important to point out for 2013, shareholder’s equity almost doubled, couple this with an increased net profit,

Ford did a good job encouraging new investment. The trend is going downward, but again profits are being used to pay off long-term debt.

Gross profit margin: gross profit/net sales

2013: $18,823.00/$146,917.00 = .128 or 12.8

2012: $18,559.00/$134,252.00 = .138 or 13.8

2011: $22,919.00/$136,264.00 = .168 or 16.8

For the three years including: 2011, Ford earned 16.8 cents per dollar of revenue; 2012, Ford earned 13.8 cents per dollar of revenue; and for 2013, Ford earned 12.8 cents per dollar of revenue. Higher gross profit margin means higher profit percentage, but it also measures the efficiency of the production process. The gross profit margin is trending downward, but profits are being used to pay off long-term debt, so the figures will not reflect accurately until debt is paid down.

Debt to equity ratio: total debt/shareholder’s equity

2013: $175,643.00/$26,383.00 = 6.66

2012: $174,607.00/$15,947.00 = 10.95

2011: $163,320.00/$15,028.00 = 10.87

For the three years including: 2011, Ford financed almost 11 times more of their assets with external lending than shareholder’s equity; 2012, Ford again financed almost 11 times more of their assets with external lending than with shareholder’s equity; and in 2013, Ford financed almost 7 times more of their assets with external lending than shareholder’s equity. A higher debt-to-equity ratio is unfavorable, but the trend is dropping dramatically, this shows Ford is working hard to reduce its debt and rely more on its own internal equity.

It is important to point out that this statement’s debt ratio is 290.43%; this is because Ford used only total long-term liabilities. Even with this variation, Ford has worked hard to bring their debt level down, and their efforts are working.

Debt ratio: total liabilities/total assets

2013: $175,643.00/$202,026.00 = .869 or 86.9%

2012: $174,607.00/$190,554.00 = .916 or 91.6%

2011: $163,320.00/$178,348.00 = .915 or 91.5%

For the three years including: 2011, Ford financed 91.5% of their assets with external financing; 2012, Ford financed 91.6% of their assets with external financing; and for 2013, Ford financed 86.9% of their assets with external financing. A lower debt ratio is more favorable, a higher debt ratio means more assets are claimed by creditors. The trend on this ratio is downward indicating slow, yet serious progress on reducing the long-term debt.

Current ratio: (current assets/current liabilities):1

2013: $151,569.00/$74,131.00 = 2.04:1 or 2.04:1

2012: $142,094.00/$73,428.00 = 1.94:1 or 1.94:1

2011: $133,046.00/$73,038.00 = 1.82:1 or 1.82:1

For the three years including: 2011, Ford’s assets outweighed their liabilities by almost 2 to 1; 2012, Ford’s assets outweighed their liabilities by almost 2 to 1; and for 2013, Ford’s assets outweighed their liabilities by just over 2 to 1. Basically, Ford has more than enough current assets to cover its current liabilities. The trend for this ratio is upward, and demonstrates Ford’s commitment to maintaining a positive status.

Quick ratio: (current assets – inventory)/current liabilities

2013: ($151,569.00 - $7,708.00)/$74,131.00 = $143,861.00/$74,131.00 = 1.94

2012: ($142,094.00 - $7,362.00)/$73,428.00 = $134,732.00/$73,428.00 = 1.83

2011: ($133,046.00 - $5,901.00)/$73,038.00 = $127,145.00/$73,038.00 = 1.74

For the three year including: 2011, Ford had $1.74 current assets for every $1 of current debt; 2012, Ford had $1.83 in current assets for every $1 of current debt; and for 2013, Ford had $1.94 in current assets for every $1 in current debt. Basically, Ford has more than enough liquid assets to cover its current liabilities. The trend for this ratio is also upward, a clear indication of Ford’s liquidity.

Inventory turnover: cost of goods sold / inventory

2013: $128,094.00/$7,708.00 = 16.62

2012: $115,693.00/$7,632.00 = 15.71

2011: $113,345.00/$5,901.00 = 19.21

For the three years including: 2011, Ford turned its inventory over 19 times; 2012, Ford turned its inventory almost 16 times; and for 2013, Ford turned its inventory almost 17 times. The higher the IT the better the inventory turnover. Basically, Ford sold its entire stock out almost 17 in 2013. The trend for this ratio is upward, indicating a high inventory turnover.

Total asset turnover: net sales/total assets

2013: $146,917.00/$202,026.00 = .73

2012: $134,252.00/$190,554.00 = .70

2011: $136,264.00/$178,348.00 = .76

For the three years including: 2011, Ford used 76% of its assets to generate revenue; 2012, Ford used 70% of its assets to generate revenue; and for 2013, Ford used 73% of its assets to generate revenue. A higher number means assets are being used more efficiently, a lower number indicates an inefficient use of assets. The trend on this ratio is downward, which normally indicates a weak investment strategy. I must point out that it is not a weak investment strategy; Ford must make sure they have a strong current asset level to maintain their loan payments.

Price earnings ratio: current share price/EPS EPS = (net income/outstanding shares)

The stock price on 1/15/15 was $14.86

2013: $15.43/$1.795 = $8.60 EPS = $7,155.00/3,984 = $1.795

2012: $12.95/$1.435 = $9.02 EPS = $5,665.00/3,946 = $1.435

2011: $10.76/$5.20 = $2.07 EPS = $20,213.00/3,887 =$5.20

For the three years including: 2011, the P/E was $2.07; 2012, the P/E was $9.02; and for 2013, the P/E was $8.60. Even though the PE dropped from the previous, Ford’s P/E’s are improving, and have shown major improvement since 2011. The trend for the P/E is decreasing, but more recent figures show it is on the increase, and maintaining.

Trend Analysis, Common-Size Analysis, and Index Analysis

Trend Analysis, also called Horizontal Analysis, is a balance sheet that focuses on trends and changes in financial statements over time. It compares two or more year’s statements, and shows changes in dollars and percentage, and uses a base year. For example: The base year equals 100%, with all other years stated in some percentage of the base. It helps analysts focus on key factors that affect profitability or financial position.

Common-Size Analysis, also called Vertical Analysis, is a balance sheet where every dollar amount has been restated as a percentage of total assets and total liabilities. For example: Total assets are 100% and all assets are stated as a percentage of total assets (5%, 17%); total liabilities are 100% and all liabilities are stated as a percentage of total liabilities (2%, 11%). A company can compare its percentage with other company’s and industry statistics to determine if their percentage is reasonable, and allows more than one person to compare the items without revealing dollar amounts.

Industry Comparison

For 2013, General Motors led the way in the U.S. with annual sales of 2.8 million units, followed by Ford Motor Company with 2.5 million units, with Toyota in third place with 2.2 million units (N.A., Auto Industry Stock Outlook-February 2014, 2014).

My Recommendations

Before I begin, it is important we take a look back in history. In 2006, sales of the big three dropped, and 0% financing was introduced. I 2006, Ford mortgaged their assets to raise $24.5 billion. In 2008, auto sales were 37% lower than the previous year, and the big three had not operated profitably for years. Fords losses were in line with Honda and Toyota, while GM and Chrysler were worse. In 2009, the Federal Government created the Automotive Industry Finance Program, and included GM and Chrysler, Ford requested a $9 billion line of credit from the government, and a $5 billion loan from the Energy Department. As a result of their request Ford pledged to accelerate development of more fuel efficient, hybrid and electric vehicles, retool their plants to increase production of smaller cars, close non profitable dealerships, and sell off Volvo. After all their efforts Ford decided not to accept the bailout, they did not need it, nor did they want it. Thanks to Ford’s efforts, today they are in better shape than their two major U.S. competitors (Amadeo, 2015).

Based on the financials from 2011 through 2013, Ford’s biggest issue is its long-term debt. The debt issue has created a ripple effect on all their financials. The gross profit has dropped by 1 percent each year over the last two years, debt-to-equity is high but has dropped incrementally each year, assets-to-liabilities has been consistently at least 2-1 and rising, and the inventory turnover is over 16-1 and rising. Their debt payments are consuming their profits, and driving down their EPS and the ROE, but this will be resolved when Ford’s debt is reduced to practical proportion.

On the up side, Ford’s shareholder’s equity almost double in 2013, couple this with an increased net profit, and Ford did a good job of encouraging new investment.

It was also great news when Ford’s stock was upgraded from hold to buy. Ford’s strengths are seen in revenue growth and notable return on equity (Wire, 2015)

In conclusion, it is clear Ford has more than sufficient sales and assets to pay their long-term and short-term debts. With a 73% asset turnover, Ford needs to invest their assets more aggressively, and wisely. We need to minimize our dependency on outside financing, and continue to reduce the debt to drive up the ROE and EPS. Ford also needs to continue their efforts to design and produce more fuel efficient cars, trucks, and SUV’s, as well as hybrid and electric vehicles, addressing the younger market, and in the process drive sales up.

REFERENCES

Amadeo, K. (2015). Auto Industry Bailout (GM, Ford and Chrysler). Retrieved from aboutnews.com: www.aboutnews.com/Industry Ananlysis

Averkamp, H. (2015). Financial Ratios Explanation. Retrieved from www.accountingcoach.com/financial ratios/explanation

Hampton, S. (2015). Ford Motor Company Financials. Retrieved from Hoover's Inc.: www.CTUonline.edu/library/Hoover's D & B

N.A. (2014, February 2). Auto Industry Stock Outlook-February 2014. Retrieved from zacks.com: www.zacks.com/commentary/31215/auto-industry-stock-outlook-Feb-2014

Oabidullah, J. (2013). Financial Ratio Analysis Explained. Retrieved from www.accounting explained.com/financial ratios

Wire, S. (2015). Ford Motor Company Stock Upgraded (F). Retrieved from the street: www.thestreet.com/story/11853454/1/ford-motor-co-stock-upgraded-F.html