Ford Case Study Analysis
Introduction
Any effective entrepreneur or financial specialist is always assessing the execution of the organizations they are included with, contrasting chronicled figures and its industry rivals, and even with fruitful organizations from different businesses (Rangan & Lee, 2011). To finish an intensive analysis of any organization’s adequacy, notwithstanding, a greater number of requirements to be taken a gander at than the effortlessly feasible numbers like deals, benefits, and aggregate resources. Fortunately, there are numerous decently tried ratios out there that make the assignment a bit less overwhelming. Financial ratio analysis aides distinguish and measure an organization’s qualities and shortcomings, assess its financial position and shows potential dangers (Gertler & Kiyotaki, 2010).
Similarly, as with some other type of analysis, financial ratios aren’t complete and their outcomes shouldn’t be seen as the main potential outcomes. Then again, when utilized as a part of conjuncture with different business assessment forms, financial ratios are significant. By analyzing Ford Motor Company’s financial ratios, alongside a couple of other organization considers, this report will give an agreeable picture of how the organization is getting along now and ought to do later on.
This is a trend table of Ford’s financial ratio for the previous five years:
Ford Motor Co. (DE)
| Ratios | 12/31/2004 | 12/31/2003 | 12/31/2002 | 12/31/2001 | 12/31/2000 |
| Return on Equity (%) | 21.65 | 7.6 | 5.18 | -60.04 | 29.07 |
| Return on Assets (%) | 1.19 | 0.29 | 0.1 | -1.97 | 1.9 |
| Return on Investment | 8.13 | 5.62 | 5.87 | 2.23 | 11.24 |
| Gross Margin | 0.021 | 0.021 | 0.023 | 0.02 | 0.026 |
| Operating Margin (%) | 6.22 | 4.94 | 5.56 | 2.07 | 10.42 |
| Net Profit Margin (%) | 2.03 | 0.3 | -0.6 | -3.36 | 2.04 |
| Quick Ratio | 0.29 | 0.35 | 0.35 | 0.21 | 0.19 |
| Current Ratio | 0.48 | 0.53 | 0.52 | 0.32 | 0.22 |
| Working Capital/Total Assets | -0.20 | -0.23 | -0.14 | -0.17 | -0.19 |
| Total Debt to Equity | 9.12 | 12 | 24.21 | 18.12 | 7 |
| Long Term Debt to Assets | 0.32 | 0.37 | 0.40 | 0.42 | 0.32 |
| Interest Coverage | 1.72 | 1.12 | 1.10 | 0.8 | 1.75 |
This is a trend table of industrial average financial ratio for the previous five years in comparison:
Industry Averages
| Ratios | 12/31/2004 | 12/31/2003 | 12/31/2002 | 12/31/2001 | 12/31/2000 |
| Return on Equity (%) | 16.22 | 8.65 | -80.32 | –0.41 | 21.06 |
| Return on Assets (%) | 2.34 | 0.68 | -1.88 | 3.46 | 3.87 |
| Return on Investment | 8.13 | 5.62 | 5.87 | 2.23 | 11.24 |
| Gross Margin | 0.021 | 0.18 | 0.18 | 0.18 | 0.023 |
| Operating Margin (%) | 5.11 | 4.04 | -5.56 | 7.07 | 8.42 |
| Net Profit Margin (%) | 2.83 | 1.43 | -0.69 | 3.39 | 3.22 |
| Quick Ratio | 0.89 | 0.55 | 0.73 | 0.73 | 0.70 |
| Current Ratio | 1.23 | 1.34 | 1.11 | 1.87 | 1.44 |
| Working Capital/Total Assets | 0.12 | 0.12 | 0.02 | 0.05 | 3.21 |
| Total Debt to Equity | 7.12 | 10.87 | 18.21 | 15.11 | 9.12 |
| Long Term Debt to Assets | 0.32 | 0.46 | 0.93 | 0.98 | 0.21 |
| Interest Coverage | 8.82 | 2.00 | 0.88 | -1.23 | 5.64 |
The analysis of these ratios shows how Ford stands as a company for the past five years.
Return on equity (ROE)
Uncovers the amount of benefit an organization earned in analysis to the aggregate sum of shareholder value on the asset report. For long haul contributing with awesome prizes, organizations that have an exceptional yield on value ratios can give the greatest adjustments. This ratio additionally tells speculators how viably their capital is being reinvested, so it is a decent gage of administration’s cash taking care of abilities. The passage is demonstrating an impressive turn around here this previous year, which could without much of a stretch be because of changes in administration. They are additionally sensibly emulating the business around there.
Return on assets
(ROA) tells the amount of benefit an organization creates for every dollar in resources. It quantifies the advantage power of a business. They bring down the benefit every dollar of advantages, the more resource escalated the business is. The passage is resource serious, in light of the fact that it requires enormous, costly supplies to produce a benefit. This implies more cash must be reinvested into the organization to keep on producing a profit. Despite the fact that their lower number is depicted in resource force, Ford is reliably falling a couple of rate focuses underneath the business normal here. This could be a thought against the organization.
Return of investments
(Return of investments) the ratio measures the consolidated impacts of overall revenues and aggregate resource turnover. This ratio analyzes the way an organization produces benefits, and the way it uses its resources for creating deals. In the event that advantages are utilized successfully, ROI will be high. As indicated by Ford’s numbers, this has been a region of slow change over the recent years, after a radical drop from 2000 to 2001. This is the standard for the business, also. Worker evaluating advancements will be an enormous thought here during the current year.
Gross margin
Has a tendency to stay steady over the long haul. Be that as it may, this ratio is still essential to assess, on the grounds that changes can be an indication of extortion or unpredictable financials. A higher horrible edge than different organizations in the business likewise indicates more proficiency. Passage’s consistency in this ratio praises the organization’s steadiness. The way that the organization is reliably in front of the business additionally talks very of Ford’s productivity rate.
Working edge likewise measures the administration’s productivity. It does as such by looking at the nature of an organization’s operations to others in the business. A higher working edge has a tendency to mean lower altered expenses and better horrible edge. This gives the administration more adaptability when setting costs, which is especially vital amid times of financial hardship. This is an alternate region where Ford is abating turning things around. It is no astonishment, however, that the organization is additionally fairing above industry midpoints around there.
Net profit margin
Is what amount of benefit an organization makes for each dollar it produces in income? Ordinarily, the higher the organization’s net revenue, the better. In any case, there are instances of lower net revenue numbers being an indication of an organization’s evaluating technique or a value war. This is the first unmistakable indication of Ford’s numbers coming back to the gainfulness of 2000. While the organization is fairing marginally lower than the business normal around there, it is barely sufficiently huge to warrant a lot of a cautioning.
Quick ratio
Is the hardest gauge of an organization’s liquidity and quality? It takes a gander at an organization’s benefits, discovers what can be quickly changed over to money, and partitions that by the organization’s liabilities (Woodford, 2010). This tells the amount of money an organization can think of in a matter of hours or days.
Current ratio
Is a comparable test to speedy ratio, yet it ascertains what number of dollars in resources are prone to be changed over to trade inside one year in for cold hard currency request to pay obligations that come due amid that same year. Excessively high a number, in the same way as a 3 or 4, implies that there is an excessive amount of money close by that is not being reinvested. A number beneath 1, in the same way as that of Ford’s, implies that there is a negative working capital. This is adequate if the stock can instantly be changed over to money. On the other hand, in both brisk and current ratios, Ford is falling enough underneath industry midpoints for it to issue some worry.
The working capital ratio
Uncovers all the more about the financial state of a business than different figuring. It makes it simple to predict any financial challenges that may emerge. For Ford’s situation, the turnover is not brisk enough not to keep a working capital save if there should arise an occurrence of financial hardship. The business normal falls rapidly behind this hypothesis with short of what a rate point contrast for as far back as five years.
Working capital ratio measures the amount of cash an organization ought to have the capacity to acquire over drawn out stretches of time. The ordinary level of obligation fluctuates, however any organization more than 40 to half ought to be taken a gander at all the more precisely on the off chance that there are fluid issues. Passage is fit as fiddle around 8% this previous year in analysis to 25% of 2002. This is yet an alternate zone where Ford is just after industry midpoints.
Long haul obligation to resource ratio can give valuable data with respect to the extent to which that organization funds its advantages with a long-term obligation. It can serve as an option for assessing financial influence. Portage conveys such a low rate in this specific ratio, there is more influence. A large portion of the business falls under the level of influence here.
Interest coverage ratio
Is an estimation of the quantity of times an organization could make its advantage installments with its income before investment and assessments? They bring down the ratio an organization has, the higher the organization’s obligation trouble. This ratio gives stockholders a reasonable picture of the fleeting financial capacities (Doyle, Ge & McVay, 2007). At present, Ford is not experiencing issues producing the money to pay its advantage commitments, yet they are not about as secure as whatever remains of the business for the past few years.
The greatest component, adjacent to ratios, that needs to be considered in assessing Ford at this moment is the overwhelming outside business. Toyota is a prime illustration, as they are pushing some way or another to the number three spot in the United States car industry. The mind-boggling value climbs in human services of the years has gradually and most likely injured the American car industry in their endeavors to meet the annuities of all their past workers. This is not an issue for outside organizations, who have national social insurance frameworks set up. Unless things turn around, this shortage will cover the US car industry.
The key new activity for Ford, and additionally whatever is left of the business, is in creating half breed vehicles. Fuel effectiveness is an objective of the nation all in all, and President Bush has conferred a lot of cash towards this exploration. Notwithstanding, the lull in congress has not delivered the cash needed to do the innovative work for the huge three in the auto business. The few half and half vehicles that exist are scarcely an answer, nor are they paying for themselves in the fantastic plan of things yet.
From this investigation of Ford, now would not be a prime time to put resources into this organization. As opposed to the good faith of the yearly report, the American car industry’s battle is not over. While the numbers have started to turn around marginally over the past few years, Ford still has far to go. The innovative work alone that is obliged to support the auto business into its own particular is still years from execution (Kashyap, Stein & Hanson, 2010). While the financial ratios don’t warrant safeguarding boat for those that have officially put resources into this battling industry, present and future fuel issues will make it increasingly hard for any of the huge three to be effective. Besides, the financial trouble of paying American annuities cuffs the once auto goliaths from sifting more cash towards headway.
The DuPont Analysis.
An end to end strategic analysis technique of an organization ought to be done to spotlight on the accompanying essential points of view of the business. The business standard strategy for financial execution observing of Ford is to keeping a nearby look on the essential ratios of the organization:
Profit Margin
Net Income
= PM =
Sales (Total Revenues)
| Sales (Total Revenues) | |||||
| Total Asset Turnover = TAT = | |||||
| Total Assets | |||||
| Return on Investment = ROI = Profit Margin X Total Asset Turnover | |||||
| Net Income | Sales (Total Revenues) | ||||
| = | X | ||||
| Sales (Total Revenues) | Total Assets | ||||
Net Income
=
Total Assets
Total Assets
Equity Multiplier = EM =
Total Equity
Return on Equity = Profit Margin X Total Asset Turnover X Equity Multiplier
= Return on Investment X Equity Multiplier
| Net Income | Total Assets | ||||
| = | X | ||||
| Total Assets | Total Equity | ||||
| Net Income | |||||
| = | |||||
| Total Equity | |||||
These five discriminating ratios are on the whole dissected in the DuPont model which is broadly utilized by Finance Managers and Consultants around the world. The last yield of DuPont analysis is the Return on Equity.
The flow chart for the DuPont Analysis of Ford
References
Doyle, J. T., Ge, W., & McVay, S. (2007). Accruals quality and internal control over financial reporting. The Accounting Review, 82(5), 1141-1170.
Gertler, M., & Kiyotaki, N. (2010). Financial intermediation and credit policy in business cycle analysis. Handbook of monetary economics, 3(3), 547-599.
Kashyap, A. K., Stein, J. C., & Hanson, S. (2010). An analysis of the impact of ‘substantially heightened’capital requirements on large financial institutions.Booth School of Business, University of Chicago, mimeo.
Rangan, V. K., & Lee, K. L. (2011). Ford Motor Company: Strengthening the Dealer Network. Harvard Business School Marketing Unit Case, (511-132).
Woodford, M. (2010). Financial intermediation and macroeconomic analysis.The Journal of Economic Perspectives, 21-44.
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