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Ford Motor Company is a global leader in the automotive industry based in Dearborn, Michigan. It manufactures and distributes automobiles in 200 markets across six continents. It has more than 100 plants worldwide and employee strength of 280,000 employees. The company’s core and automotive brands include Ford, Jaguar, Land Rover, Lincoln, Mercury, Volvo, Aston Martin and Mazda. The company provides financial services through Ford Motor Credit Company.

 

The Ford Motor Company was founded in 1903 by Henry Ford. During its early days the company produced just a few cars a day. By 1913, Ford was producing 50% of all cars in the United States. The company has expanded its operations ever since 1913. The company did have its share of rises and falls. The market share fell during the period of the great depression in 1931. It was only in 1939 thereafter that they were able to regain their sales revenues. The outbreak of the Second World War resulted in a decrease in the domestic production of the routine models. The company produced a major portion of the war jeeps and the trucks during that period. At that point in time they also produced aircrafts for the purpose of war.

Up to this time in history Ford was a family owned business. In 1956, it became a publicly traded corporation. However, the Ford family still holds a controlling interest in the company. Henry Ford’s grandson, William Clay Ford Jr. is the company’s current chairman and CEO.

William Clay Ford took over in 1998. His achievements include establishing the company’s first automotive plant in the world to use 25% post consumer materials in all of its plastic parts. A lifelong environmentalist he is committed to developing eco-friendly products and processes.

Ford aspires to be the world’s leading consumer Company for automotive products and services. They believe that people are the heart of their vision and they strive to improve the quality of people’s lives through their progress.

Ford’s mission is to see themselves as a global, versatile family with a proud heritage. They have a passion that drives them to create excellent products and services that their customers welcome both now and in the future.

Their values put people first. As a company they are concerned about the welfare of their customers, employees and society. They take an approach that is in perfect harmony with the environment and also with modern technology.

The company operates in two business operations: automotive and financial services. The automotive business consists of the design, development, manufacture, sale and service of cars, trucks, buses, vans, pick-ups, SUV’s and a number of vehicles in the heavy vehicle and the medium segment. The financial service segment operates through the company subsidiary, Ford Motor Credit Company. It offers a wide variety of financing products to, and through dealers throughout the world.

According to the “Fortune” magazine, DaimlerChrysler and Toyota Motor replaced Ford as the world’s number two and three automobile manufactures by revenue only in 2004. Ford for a very long time was the world’s second largest automotive company just behind [1]General Motors.[2]

The market share of Ford in the United States has been falling drastically for the past ten years in a row. In the year 2002 they had a 20.2% share in the US market where they carry out a major part of their operations. It has fallen to 17.4% by the year 2005.

Analysts believe that Ford will continue to lose is market share even further due to its over-aged portfolio.

 

 

 

 

 

 

 

                             THE COMPANY- THROUGH THE YEARS

The company was established in the year 1903 by Henry Ford and 11 associates. It made its first shipment in the first year itself. It launched its T model in the year 1908.

The company began producing trucks and tractors in 1917. In 1925, they acquired Lincoln Motor Company branching out into luxury cars. In 1956, Ford became a public company and it produced one of the most successful cars in history Thunderbird.

Ford experienced further growth in the 1990’s. They acquired Jaguar in the same year and increased their stake in Hertz to 100%. It also acquired Volvo in the same year.

In the year 2000, Ford acquired Land Rover from BMW.

 

Ford expanded its presence in China in 2002-2003. They have a JV in China with Changan Automobiles. It became the main hub for the production of Ford Fiesta.

 Ford sold Jaguar racing, its Formula One team in the year 2004.

 

Ford sold Hertz Corporation, one of the largest general use car rental businesses in the world during the year 2005. It also sold its interests in Mahindra and Mahindra and Vastera in the same year.

 

In the year 2006, Ford became the first automotive manufacturer to commence the production of dedicated hydrogen fueled V-10 engines.

 

 

Ratio analysis is a very important tool in financial analysis. It involves establishing a relevant financial relationship between components of the balance sheet. Two companies may have earned the same amount of profit in a given year, but unless the profit is related to sales or total assets. It is not possible to conclude which of the two is more profitable. Ratio analysis helps in identifying significant relationships between financial statement items for future investigation.

The two figures used to draw the ratio must be related to each other and have a cause and effect relationship. Ratios indicate a quantitative relationship that the analyst uses to make a qualitative judgement about the various aspects of the financial position and performance of the concern.

 

This ratio is also called as return on sales (ROS). It measures the amount of profit earned per unit of revenue.

It is calculated as

Profit margin = Profit after Tax

                                     Sales

 

The ratio for the FORD company in the year 2003 was 0.0075.

In the year 2004, it was 0.024. In 2005 it fell to 0.014.

In 2006 the ratio is the ratio rose to 0.077.

 

The profit margin ratio shows some cushion available to the company in the case of an increase in costs or a drop in the sales prices in the face of recession or greater competition or when the demand for the product is falling. The ratio indicates what portion of sales is left to pay dividends and to put away as reserves.

The higher the ratio the more the capacity of the firm to withstand adverse economic conditions.

 

This ratio is a measure of how efficiently the assets are utilized. It measures the firm’s ability to generate sales per unit of investment n the fixed assets.

                              

                  It is calculated as the ratio of sales and the average total assets.

                                   

                      ASSET TURNOVER RATIO =            Sales

                                                                          Average Total Assets

                      

                   A higher ratio indicates that the assets are being utilized efficiently. If the                                          

 ratio is low it indicates that the firm is keeping more assets than that is required for it. Averages rather than the year end amounts are more appropriate. It should however be noted that there is no direct relationship between sales and assets. Sales are affected by many other factors other than assets like quality of products, delivery terms, advertisement etc. This variation in this ratio is more pronounced for fast growing companies.

 

This is a measure of profitability from a given level of investment. It is an excellent indicator of the overall performance of a company. Profit margin and asset turnover are the drivers of return on assets ratio. This can be derived from the Du Pont approach.

 

It can be calculated as ROA =   Profit after Tax

                                               Average Total Assets

To achieve a certain ROA, business enterprises can chose between various combinations of profit margins rates and asset turnover times. Companies that operate in the mass market like the supermarkets typically have low profit margins but the asset turnover is high. However companies that sell premium products have a low asset turnover but their profit margins will be high. It is also called as return on investment.

The higher the ROA number the better as the company is making more profits on less investment.

 For the company under consideration the ROA for the year 2003 was 0.0042. In 2004 it rose to 0.0189. 2005 the figure again fell to 0.0089 and in the year 2006 it has risen again to 0.045. The company has not been using the full installed capacity for a couple of years. The operations in North America and Europe itself that account for a major portion of their earnings has an excess installed capacity of about 14% to 17% in the year 2003. The company will take some time to get over this condition and utilize their full capacity.

 

 

 

 

 

 

 

A measure of a corporation’s profitability that reveals how much profit a company generates with the money the shareholders invested. It is also called as return on net worth (RONW).

 It is usually calculated as = PROFIT AFTER TAX

                                   AVERAGE SHAREHOLDERS EQUITY

 

The return on equity in the 2003 was 0.143. The figure rose to 0.282 in the year 2004. ROE figures again fell to 0.1729 in the year. The figure rose to 1.5.

ROE indicates the contribution earned for every one rupee that is invested in the business by the shareholders.

 

 

 

 

 

 

 

 

Liquidity Ratio:

 

Liquidity is the ability of a company to meets its short-term obligations when they fall due. A company should have enough cash and other current assets, which can be converted into cash so that if can pay its suppliers and lenders on time. In evaluating Ford's liquidity four ratios are presented: the current ratio, debtor turnover, and inventory turnover.

 

                        The current ratio is the ratio of current assets to current liabilities. It is widely used indicator of a company's ability to pay its debts in the short term. It shows the amount of current assets a company has per rupee of current liabilities.

The Current Ratio is calculated as shown below:

Current Ratio = Current Assets / Current Liabilities

 

 

All Current assets are not equally liquid. While cash is readily available to make payments to suppliers and debtors can be quickly converted into cash, inventories are two steps away from conversion into cash. The ratio relates highly liquid current assets and is calculated as shown below:

Quick Ratio = Quick Assets / Current Liabilities

 

 

 

The ability of a company to collect from its credit customers in a prompt manner boosts the company's liquidity. The debtor turnover ratio measures the efficacy of a company's credit and collection policy. The ratio shows the number of times each year a company's debtors turn into cash. The ratio provides some indication of the quality of both debtors and the company's collection efforts. A high debt turnover ratio indicates that debtors were converted frequently into cash and the quality of the company's portfolio of debtors can be considered good. The debtor turnover is calculated by:

 

Debtor Turnover = Sales / Average Debtors

 

 

This ratio shows the number of times a company's inventory is turned into sales. Investment in inventory represents idle cash. The lesser the inventory, the greater the cash available for meeting operating needs. Besides, a lean, fast-moving inventory turnovers are indicative of efficient inventory management.

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventories

 

Current ratio and Quick ratio looks very healthy. The company’s short term debt repaying capacity seems to be very healthy. Initially, though it was very high at 4.11. The decline is justified as the general norm is to maintain the Current ratio at 2 and quick ratio at 1. The small difference in the ratios indicates very less investment in Inventory.

 

Debtors Turnover indicates the number of times the company debtors are converted into cash, which needs to be maintained very high. Though the company’s current position looks healthy and good, but it is gradually declining, though it is not alarming.

 

Inventory Turnover indicates the number of times the company converts the stock in a year. A higher ratio indicates efficient inventory management, reduction in losses due to obsolescence and wastage. The ratio looks to have stabilized at around 13 times.

 

 

 

 

 

 

 

The long term solvency of a company is affected by the extent of debt used to finance the assets of the company. The presence of heavy debt in a company's capital structure is thought to reduce the company's solvency. The debt-to-equity ratio and the coverage ratio are the two important indicators of solvency.

 

A wise mix of debt and equity can increase the return on equity for two reasons. One, debt equity is cheaper than equity. Two, interest payments are admissible expenses for determining the taxable income of the company, whereas dividends are paid from taxed profits. Excessive use of debt financing is considered risky. The debt-to-equity measures the relationship of the capital provided by creditors to the amount provided by shareholders. Debt includes both short term and long term debt.

The ratio indicates the extent of use of financial leverage. A high debt-to-equity ratio indicates an aggressive use of leverage, and a highly leveraged company is more risk for creditors. A low ratio, on the other hand, suggests that the company is making little use of leverage and is too conservative.

Debt to Equity Ratio = Short term Debt + Long Term Debt / Shareholder's Equity

 

 

 

This is a measure of measure of protection available to creditors for payment of interest charges by the company. The ratio shows whether the company has sufficient income to cover its interest requirements by a wide margin. A high ratio implies adequate safety for payment of interest even if there were to be a drop in the company's earnings. The interest coverage ratio is as follows:

Interest Coverage ratio = Profit Before Interest and Tax / Interest Expense

 

Since the debt to equity ratio is very high in a year, the business is in high risk. With increasing debts, the interest also increases bringing down your profits. The fact that interest coverage is negative reaffirms that the earnings is not enough to pay the interest. This could be perceived as risky by creditors. One of the reasons could be a high interest.

 

 

Cash flow analysis is an analytical tool to study the impact of the business transactions on a particular period on the most liquid form of asset, cash; and understand the ability of the firm to generate cash and utilize those cash efficiently. And cash flow statement is a statement depicting the reasons for the change in cash position from one period to another. It helps in evaluating the current cash position, develop financial policies, to know the repayment capacity of the firm, to find the factors contributing to the reduction of cash balance inspite of increase in income or vice versa taking controlling measures, etc.