Accouting of Ford Motor Company - Assignment Example

Introduction The selected company for conducting financial analysis is Ford Motor Company (Ford). Ford is one of the industry giants in global manufacturing and selling of automobiles. There are about 90 manufacturing plants worldwide, employing 213,000 workforce. Various brands are produced which include Ford, Mercury, Volvo, and Lincoln (Ford, 2009, p.1). This report discusses the financial performance of Ford through conducting ratio analysis of 2008 financial statements. A comparison is made with competitors, including BMW and General Motors (GM) to determine whether the company is performing better or worse than the general automobile industry and competitors. Moreover, the performance of the company is measured against itself by conducting rend analysis between 2008 and 2007 financial results. Nine ratios are calculated to determine liquidity, profitability, and efficiency of Ford’s operations for 2008 and 2007. These ratios include: 1. Net Profit Margin, 2. Return on Capital Employed, 3. Gross Profit Margin, 4. Current Ratio, 5. Acid Test Ratio, 6. Stock Turnover Period, 7. Debtors Collection Period, 8. Creditors Collection Period, 9. Gearing Ratio For the purpose of this analysis, the consolidated financial statements have been used for all companies but figures for assets and liabilities are used for automotive business only. The industry average is calculated by calculating ratios for Toyota, Honda, BMW, General Motors, and Ford. Ratio Analysis 1. Net Profit Margin Net profit margin is a measure of profitability and defines how much profit is gained through sales. The higher the net profit margin, the better it is for company’s profitability. Net Profit Margin = Net Profit / Sales Revenue The Net Profit Margin for 2008 is provided below: Company Net Profit Sales Revenue Net Profit Margin Ford (14,672) 129,166 -11.36% BMW 428 69,076 0.62% GM (30,860) 147,732 -20.89% Toyota 17,522 246,608 7.11% Honda 5,989 119,801 4.99% (All amounts are in million $) Net Profit Margin for Ford in 2007 = (2,723) / 154,379 = -1.76% Net Profit Margin – Industry Average in 2008 = -3.91% The above analysis shows that Ford is facing difficulties in generating enough sales volume to cover its costs. The net profit margin in 2007 was negative and it has gone further down in 2008, showing a consistent failure of Ford’s management in meeting its profitability objectives. Companies like Toyota and Honda are leading the industry in terms of profitability. 2. Return on Capital Employed (ROCE) ROCE measures the efficiency of investing capital in the company operations and the income generated from it. It is desired to be on the higher side. ROCE = Earnings Before Interest & Taxes / Total Assets – Current Liabilities The ROCE for 2008 is provided below: Company EBIT Total Assets Current Liabilities ROCE Ford (9,293) 73,845 49,178 -37.7% BMW ROCE = 4.90% (BMW Annual Report, 2008) GM (21,284) 91,047 73,911 -124% Toyota 22,153 331,074 148,990 12.2% Honda 9,513 125,916 46,696 12.0% (All amounts are in million $) ROCE for Ford in 2007 = (4,268) / (118,489 – 50,473) = -0.063 = -6.27% The above analysis shows that Honda and Toyota are leading the automobiles market with positive ROCE; whereas Ford is in genuine trouble. The ROCE for 2007 was negative and it has worsened in 2008. General Motors has depleted its capital resources. 3. Gross Profit Margin Gross profit margin assists in understanding the profitability of an organization. Gross Profit Margin = (Sales Revenue – Cost of Sales) / Sales Revenue The Gross Profit Margin for 2008 is provided below: Company Sales Revenue Cost of Sales Gross Profit Margin Ford 129,166 127,103 1.60% BMW 63,343 52,967 16.38% GM 147,732 149,311 1.07% Toyota 246,608 208,613 15.4% Honda 119,801 85,270 28.8% (All amounts are in million $) Gross Profit Margin for Ford in 2007 = (154,379 – 142,587) / 154,379 = 7.64% Gross Profit Margin – Industry Average in 2008 = 12.7% The gross profit margin for Ford has declined over the last two years. It is currently below the industry leaders like Toyota and Honda. 4. Current Ratio Current ratio provides information about an organization’s liquidity situation, vis-à-vis, the amount of cash or cash equivalent securities the company has to meet its short term obligations. Current ratio of at least 1 is desirable; and ratio close to 2 is preferable. Current Ratio = Current Assets / Current Liabilities The Current ratio for 2008 is provided below: Company Current Assets Current Liabilities Current Ratio Ford 34,124 49,178 0.69 BMW 38,870 21,868 1.78 GM 41,224 73,911 0.56 Toyota 120,633 119,181 1.01 Honda 52,216 46,696 1.12 (All amounts are in million $) Current ratio for Ford in 2007 = 54,243 / 50,473 = 1.08 Current ratio – Industry Average in 2008 = 1.0 The current ratio of Ford has reduced below 1% in 2008 which is a red flag showing that the company is not able to service its short term debt. The situation has been deteriorated from 2007 where the current ratio was 1.08. 5. Acid Test Ratio Acid test ratio is another indicator of liquidity with an organization and includes security that can be readily liquidated. Acid Test Ratio = (Cash + Accounts Receivables + Short Term Investments) / Current Liabilities The acid test ratio for 2008 is provided below: Company Numerator Current Liabilities Acid Test Ratio Ford 21,172 49,178 0.43 BMW 11,094 21,868 0.50 GM 21,677 73,911 0.29 Toyota 86,306 119,181 0.72 Honda 13,382 46,696 0.29 (All amounts are in million $) Acid Test ratio for Ford in 2007 = 38,076 / 50,473 = 0.75 Acid Test ratio – Industry Average in 2008 = 0.45 The acid test ratio of Ford has declined from 2007 figure. However, this is the case for all other market players as well. The acid test ratio of Ford is close to industry average. Thus, the company, although is not able to meet its short term obligation through its liquid assets yet, is doing the same as all other competitors in the market. 6. Stock Turnover Period Stock turnover period refers to the number of days in which inventory is replaced. A low turnover period is required which indicates that stock is being sold frequently. Stock Turnover Period = 360 x Average Stock / Sales The stock turnover period for 2008 is provided below: Company Average Stock Sales Stock Turnover Period Ford 8,618 129,166 24.02 days BMW 9,096 69,076 47.40 days GM 13,042 147,732 31.78 days Toyota 18,222 246,608 26.60 days Honda 11,970 119,801 35.97 days (All amounts are in million $) Stock turnover period for Ford in 2007 = 360 x 10,121 / 154,379 = 23.6 days Stock turnover period – Industry Average in 2008 = 33.15 days The stock turnover period for Ford shows that the company is doing well in replacing its inventories every 24 days. Although the performance has degraded over the last year but it is still better than industry average and against all competitors. 7. Debtors Collection Period Debtors collection period specifies the average number of days the company has to wait before it gets payment by debtors. The period should ideally be as small as possible to avoid probability of bad debts. Debtors Collection Period = 360 x Accounts Receivables / Credit Sales The debtors collection period for 2008 is provided below: Company Accounts Receivables Credit Sales Debtors Collection Period Ford 3,464 129,166 9.65 days BMW 2,688 69,076 14 days GM 7,711 147,732 18.8 days Toyota 20,364 246,608 29.73 days Honda 10,198 119,801 36.65 days (All amounts are in million $) Debtors collection period for Ford in 2007 = 360 x 4,530 / 154,379 = 10.56 days Debtors collection period – Industry Average in 2008 = 21.77 days As shown from above, Ford is doing better than industry, competitors and its own performance in 2007, in the area of ensuring that all receivables are received quickly (9.65 days on average). 8. Creditors Collection Period Creditors collection period specifies the average number of days in which the company pays its debts. The period should ideally match with debtors collection period so that liquidity problems do not arise. Creditors Collection Period = 360 x Accounts Payables / Cost of Sales The debtors collection period for 2008 is provided below: Company Accounts Payables Cost of Sales Creditors Collection Period Ford 10,635 127,103 30.12 days BMW 2,635 52,967 17.91 days GM 22,236 149,311 53.61 days Toyota 22,086 208,613 38.11 days Honda 10,132 85,270 42.78 days (All amounts are in million $) Debtors collection period for Ford in 2007 = 360 x 15,718 / 142,587 = 39.68 days Debtors collection period – Industry Average in 2008 = 36.506 days As shown from above, Ford’s creditors collection period is closer to industry average. It is neither too late nor too quick, although the collection period has been shortened as compared to 2007 figures. This shows that Ford paid its debts relatively quickly as compared to 2007. 9. Gearing Ratio Gearing ratios provide information about the type of funding for the organization – debt or equity. It is a measure of financial leverage of the company. Gearing Ratio = Total Debt / Total Equity The gearing ratio for 2008 is provided below: Company Total Debt Total Equity Gearing Ratio Ford 241,628 (17,311) 13.96 BMW 39,867 29,192 1.37 GM 176,387 (86,154) 2.05 Toyota 198,944 118,470 1.68 Honda 79,144 45,356 1.75 (All amounts are in million $) Gearing ratio for Ford in 2007 = 280,701 / 5,628 = 49.86 As shown from above, Ford’s equity is wiped out. This is extremely dangerous situation for company’s financial well being. The company is highly geared as shown above. Considering that the liquidity position is alarming, it is highly likely that the company will not be able to pay its obligations and in fact, may become insolvent in near future. Problems and Possible Future Effect on Financial Statements Automobile industry has been badly affected due to current global economic crisis. This is evident from above ratio analysis as well. However, Ford’s performance has deteriorated to the extent that there are doubts whether the company will be able to continue its operations. There is a need to take prompt and strong measures to rescue Ford. The company management is confident that they can improve the situation using ONE Ford plan (Ford, 2009). Inventory Discussion As per the annual report, the inventories ‘are stated at the lower of cost and the market. United States inventories are measured on Last-In-First-Out (LIFO) method. Cost of other inventories is determined on FIFO basis (First-In-First-Out). All other assets are reported on their fair current market value.’ (Ford, 2009, p.78). Accounting Concepts Going Concern Ford plans to stay in business for indefinite time period. The annual report, though portrays a bleak future picture, yet management has provided several key strategies that will be employed to improve financial situation of the company in future. However, considering the present financial situation, there is a risk that Ford may go bankrupt if the ONE Ford plan fails. Accruals Ford uses accrual based accounting system consistent with US GAAP (Generally Accepted Accounting Principles). Consistency Ford elected to present held-to-maturity securities as trading securities (using SFAS 159). ‘Before 1st January 2008, the unrealized gains/ losses of held-to-maturity securities were not recognized. However, this election resulted in cumulative after tax increase of $12 million to opening balance of Retained Earnings’ (Ford, 2009, p.77). The manner to treat uncertain tax positions was changed. In addition, the manner in which defined benefit pension and other post retirement plans are accounted was changed in 2008 (Ford, 2009, p.139). Materiality The economic crisis made a material impact on financial performance of the company in 2008. Although first quarter of 2008 was profitable, Ford went into loss for remaining part of the year and ended up with a massive $14 billion loss in 2008 fiscal year. Works Cited Ford. 2009. Ford Motor Company – 2008 Annual Report. Ford BMW. 2009. BMW – Annual Report 2008. BMW Group. General Motor Corporation. 2009. Form 10-K – General Motor Corporation. March 5, 2009. Toyota. 2008. Annual Report 2008. Toyota Motor Corporation. Honda. 2008. Annual Report 2008. Honda Motor Company. Read More