Essay/Term paper: Ford motor company

Essay, term paper, research paper:  Economics

Ford Motor Company

GROUP PROJECT

ACC 505 - FINANCIAL ACCOUNTING 12/01/96

TABLE OF CONTENTS

DESCRIPTION PAGE

INTRODUCTION........................................................1

LIQUIDITY...........................................................1-3
Working Capital...................................................1
Current Ratio & Quick Ratio.......................................2
Receivable Turnover & Average Days' Sales Uncollected.............2-3
Inventory Turnover & Average Days' Inventory on Hand..............3

PROFITABILITY.......................................................3-7
Profit Margin.....................................................3-4
Asset Turnover....................................................4-5
Return on Assets..................................................5
Debt to Equity....................................................5-6
Return on Equity..................................................6-7

CONCLUSION..........................................................7-8

APPENDIX............................................................9

INTRODUCTION

Ford Motor Company, a large United States automotive corporation, strives for
success each and every year. The success of Ford Motor Company, as well as
other corporations, can be measured by analyzing the two most important goals of
management, maintaining adequate liquidity and achieving satisfactory
profitability. Liquidity can be defined as having enough money on hand to pay
bills when they are due and to take care of unexpected needs for cash, while
profitability refers to the ability of business to earn a satisfactory income.
To enable investors and creditors to analyze these goals, Ford Motor Company
distributes annual financial statements. With these financial statements,
liquidity of Ford Motor Company is measured by analyzing factors such as working
capitol, current ratio, quick ratio, receivable turnover, average days' sales
uncollected, inventory turnover and average days' inventory on hand; whereas
profitability analyzes the profit margin, asset turnover, return on assets, debt
to equity, and return on equity factors.

LIQUIDITY Working Capital

Ford Motor Company's working capital fluctuated significantly in the years
1991-1995. This phenomenon is directly attributable to the fact that Financial
Services current assets and current liabilities are not included in the total
company current asset and current liability accounts. For example, the
fluctuation from 1994 ($1.4 billion) to 1995 (-$1.5 billion) of $2.5 billion
would suggest that Ford would be unable to pay liabilities during the current
period. However, examination of the Financial Services side of the business
reveals that surpluses of $13.6 billion existed in both 1994 and 1995,
convincingly mitigating the figures indicating negative working capital.

Current Ratio & Quick Ratio

The current ratio in the years 1991-1995 has remained stable, fluctuating
between 0.9 and 1.1. The quick ratio has also remained stable, fluctuating
between 0.5 and 0.6. The larger fluctuation in the current ratio versus the
quick ratio is caused by inventories being included in the asset side of the
equation. Although inventories were significantly higher in both 1994 and 1995,
current liabilities were also higher. In addition, marketable securities
decreased substantially in 1994 and 1995. These factors resulted in the
stability of both the current ratio and quick ratio.

Receivable Turnover & Average Days' Sales Uncollected

An examination of trends in Ford Motor Company's receivable turnover and average
days' sales uncollected ratios reveal positive indicators of Ford's liquidity
position. The receivable turnover, a function of net sales and average accounts
receivable, has nearly doubled in the years 1993-1995 versus 1991-1992. This
trend indicates an extensive increase of net sales in relation to accounts
receivable. Receivables were relatively higher in 1994 than in any other of the
five years, affecting the ratio for both 1994 and 1995. However, net sales
increased 30% in 1994 and 34% in 1995 over the average net sales of 1991-1993.
The average days' sales uncollected ratio has decreased significantly over the
same period, from 16.9 days in 1991 to 9.7 days in 1995. The substantial
decrease in average days' sales uncollected ratio coupled with the near doubling
of the receivable turnover ratio is a reflection of Ford's strong sales and
effective credit policies in years 1993-1995.

Inventory Turnover & Average Days' Inventory on Hand

An examination of trends in the inventory turnover and average days' inventory
on hand ratios also reveal positive indicators of Ford's liquidity position.
Inventory turnover, a function of cost of goods sold and inventories, has
remained stable between 14.0 and 16.0 times from 1992-1995. The average ratio
over these four years (15.1 times) is 40% higher than that of 1991. The average
days' inventory on hand, a derivative of the inventory turnover, has conversely
decreased to stable level fluctuating between 23.5 and 26.0 days in the years
1992-1995. The operating cycle of Ford Motor Company has decreased
significantly as the table below indicates.
1991 1992 1993 1994
1995
Days: 50.8 29.0 33.8 31.1
34.3

PROFITABILITY Profit Margin Profit margin, which is net income divided by net
sales, is a measure of how many dollars of net income is produced by each dollar
of sales. As you can see in Appendix 12, Ford Motor Company had a substantial 4
year rise in profit margin. Using horizontal analysis, the profit margin
increased 98% from 1991 to 1992, 566% from 1992 to 1993 and then 79% from 1993
to 1994. Although the profit margin from 1994 to 1995 decreased 26%, that is
more than acceptable when you look at the substantial increases in the past few
years. In the first year, Ford had a profit margin of -3.1%. That means for
every dollar of sales, Ford lost $3.10. This is obviously not a good position
to be in. During 1991and then carried over into 1992, it cost Ford more money
to make sales than it did when it recorded the income for those sales. They
realized at this time it was important for them to keep things such as selling
and administrative expenses lower, as well as the cost of sales, which included
their production, manufacturing, and warehousing costs. By following a plan
more complex than I can describe here, Ford steadily increased it's sales while
it lowered it's expenses and it's cost of sales. This directly increased Ford's
profit margin at a substantial rate within the next three years.

Asset Turnover

Asset turnover involves Ford's net sales divided by their average total assets.
This ratio demonstrates the efficiency of assets used in producing sales. A
company like Ford Motor Company has an enormous amount of assets. Computers to
heavy equipment to buildings. All of those assets, plus many more, are all
taken into consideration when figuring asset turnover. For example, Ford would
like to know that if it decides to purchase 20 new computer-aided engineering
stations for a cost of about $2,400,000, they would like to see a higher asset
turnover to give them the proof that the investment is being used at maximum
efficiency. Ford's asset turnover steadily increased in incremental amounts
between the years of 1991-1995 (see appendix 12), but on average it was about .
43 for the entire 5 year period. Using trend analysis to understand this ratio
would give you a pretty good idea that the asset turnover of Ford Motor Company
is stable. Trend analysis would give you an index number for 1992 of 100, while
the index number for 1995 would be 112. These index numbers would result in a
slightly positive but relatively straight line across the page. As a
prospective investor this would probably cause you to investigate more deeply as
to why Ford can't more efficiently use their assets to produce sales. As a
current stockholder, this trend over the past five years may give you some
comfort because of the incremental increases (at least it isn't going down).

Return on Assets

Return on assets is a very good profitability ratio. It is comprehensive when
compared to profit margin and asset turnover. Return on assets overcomes the
deficiency of profit margin by relating the assets necessary to produce income
and it overcomes the deficiency of asset turnover by taking into account the
amount of income produced. Mathematically, return on assets is equal to net
income divided by average total assets, or more simply put, profit margin times
asset turnover. Ford can improve it's overall profitability by increasing it's
profit margin, the asset turnover, or both. Looking at the numbers, it was
actually Ford's increase in profit margin that really gave it the boost it
needed to raise the return on assets from the black to the red. A steady
increase in return on assets from -1.3% in 1991 to an acceptable 2.2% in 1994 is
a good sign to investors. This steady climb of 169% resulted in an overall
increase in the earning power of Ford Motor Company. Ford's increase in
profitability shows satisfactory earning power which results in investors
continuing to provide capital to it.

Debt to Equity

The debt to equity ratio shows the portion of the company financed by creditors
in comparison to that financed by the stockholders. It is total liabilities
divided by stockholder's equity. Ford's debt to equity ratio is relatively high
(see appendix 12). When measuring profitability, a high debt to equity ratio
means the company has high debt and must earn more profit to protect the payment
of interest to it's creditors. This high debt to equity ratio would also
interest stockholders because it shows what part of the business is financed
through borrowing or in other words, is debt financed. Of the five years we
analyzed, the lowest debt to equity ratio was during 1991 (6.65) and the highest
was in 1993 (11.71). In comparison to return on assets, a higher creditor
financed year such as 1991 did not have an positive effect on profitability. It
seemed that through increased borrowing in 1993, a higher debt to equity ratio
was produced, but overall profitability also went up. Debt to equity is only
one part in a full profitability analysis. The only real information that the
debt to equity ratio can produce is it can show how much expansion is possible
through the borrowing of long term funds; basically it show's a company's long-
term solvency. A higher debt to equity ratio essentially means that the company
will be able to borrow less money. The company must rely more on stockholder
investment. Ford was able to lower it's borrowing of funds from 1993 through
1994 and into 1995, while still effectively increasing it's profit margin and
return on assets. This means Ford was able to use stockholder's investments to
increase it's profitability rather than borrow the funds to do it.

Return on Equity

Return on equity is the ratio of net income divided by the average stockholder's
equity. This ratio is of great interest to stockholders because it shows how
much they have earned on their investment in the business. In the years of 1991
and 1992, stockholders lost money on their investment in Ford Motor Company (see
appendix 12). No one likes to lose money, even if it is a couple of cents on
the dollar. A major stockholder could incur quite a loss because of this. In
the next three years, return on equity was on the positive side, the peak being
in 1994 when stockholders earned about 28% on every dollar invested. Quite a
good return considering some investors are happy with a steady 8% return.
Considering the previous years, the return on equity for Ford seems to be
positive. Common knowledge dictates that most companies experience a downturn
every now and then. Ford's investors are able to remain invested in the company
because it's overall 5 year return on equity is high enough to give investors
the high returns they seek. A return on equity consistently above 16% with a
few negative years mixed in is certainly lucrative enough to maintain a strong
profitability measurement and project a positive image to the investors of Ford
Motor Company.

CONCLUSION

Although Ford Motor Company is one of the largest companies in the world, we can
still attribute accounting trends to some of the key events in Ford's history.
In 1990, Ford acquired Jaguar Cars, Ltd. Jaguar was a company suffering
terrible loses due to poor quality, and lack of sales. Jaguar has been in the
black since Ford purchased them until 1994. It is important to note that Ford's
net income trend from 1991 to 1995 illustrates this. In 1992, the Ford Taurus
became the number one selling car in the United States, which helped increase
1992 net earnings, and in 1994 the Ford Falcon was the top selling car in
Australia, helping maintain the trend of increasing net income. It is important
to note that Ford's net income has increased from 1991 to 1994, and then
decreased in 1995. There are several possible causes for this change in the
trend. In 1995, Ford acquired 20% equity in a major Chinese truck manufacturer,
and launched several new vehicles; including the Ford Contour, Ford Mondeo,
Mercury Mystique, Ford F-150, and Ford Taurus. These additional investments and
expenses help explain the decrease in net income in 1995. Overall, the company
has done well, and with reorganization in 1996 to decrease spending and increase
efficiency, Ford is striving for future periods of growth.

OTHER KEY EVENTS:
1992 - Ford Citi-bank Mastercard introduced, customer 5% discount on
purchases
1994 - Ford acquires 100% of Hertz Corporation, the world's largest car
rental
company

APPENDIX

DESCRIPTION PAGE

Consolidated Income Statements...................................Appendix 1-2
Spreadsheets..................................................Appendix 1
Graphical Representation......................................Appendix 2

Consolidated Balance Sheets......................................Appendix 3-5
Spreadsheets.................................................Appendix 3-4
Graphical Representation.....................................Appendix 5

Consolidated Retained Earnings Statement.........................Appendix 6-7
Spreadsheets.................................................Appendix 6
Graphical Representation.....................................Appendix 7

Consolidated Statement of Cash Flows.............................Appendix 8-9
Spreadsheets.................................................Appendix 8
Graphical Representation.....................................Appendix 9

Evaluation of Liquidity..........................................Appendix 10-11

Evaluation of Profitability......................................Appendix 12-13

Liquidity & Profitability Formulas...............................Appendix 14