Ford Motor Company - Projecting the Profit if the US Economy Stays Unaltered, Recessing or Improving - Case Study Example

1. Based on the most recent quarter pre-tax operating profit, project the profit for the next four (4) quarters assuming that the U.S economy stays the same as today, declines into a recession and modestly improves. Explain the assumptions made to support your calculations. Economy Stay the same If the economy stays the same, it is very likely that Ford’s performance and increase in revenue will remain the same. It would be then prudent to assume that the average increase or decrease of its sale in the previous quarters would also be the same in the next four (4) quarters. Since the average increase in pre-tax operating profit in the last 3 quarters was around 5%, then it can be computed Ford’s increase in the next 4 quarters to be 2,271.15 (million)( $2,163 x 1.05), 2,384.70 (2,271.15 * 1.05), 2,503.94 (2,384.70 * 1.05) and 2,629.14. Economy declines into recession If the company will slid back into recession, it would then be reasonable to assume that profit or loss in the next four quarters would be the same during the recession which may again need a bail out from the government because it registered a loss. Economy modestly improves If the economy modestly improves, it is expected that Ford and the auto industry general will increase their sales. Since vehicle purchase is dependent on the purchasing power of its consumers, the increased disposable income of consumers afforded by an improving economy will not only encourage the consumers to buy cars because they can afford it, but also they are optimistic about the economy. The company in turn could also be optimistic in projecting its sales because it is the general characteristic of the market to be optimistic when the economy improves (Smith, 2010) It would then be reasonable for Ford to base the average increase of its sale prior to the recession when the economy was doing modestly well. It would be then safe to assume that a 10% increase in sales in every quarter for the next 4 quarter if the economy modestly improves. 2. Discuss three (3) key financial ratios that you would analyze to determine whether or not Ford would be a wise investment opportunity. Explain your rationale. If I am an investor, I would be particularly interested in the profitability and long-term viability of Ford to guarantee returns on my investments (Raiborn, 2010). In determining whether Ford would be a wise investment opportunity for me, there are two financial instruments that I will source my analysis to make a sound economic judgment whether to invest or not at Ford. These financial instruments are the income statement and the changes in owner’s equity. Income statements provide investors the economic information that the business is making a profit thus capable of giving dividends on their investments (Needles, 2011). The change in owner’s equity also interests me as an investors because this financial statement determines whether a business enterprise is making a real financial progress or otherwise The three (3) financial ratios that I would analyze that would provide me a hindsight of the company’s profitability and long term stability would be Return on Equity, Dividend Ratio and Return on Assets. Return on equity ratio will tell me how profitable Ford is given the capital it has. It gives me hindsight on its capacity to pay dividends thus putting me in a better position to determine whether my investment will make money or not. The ratio basically gives me a ballpark figure of the rate of return of my investment in the company if I will decide to invest in Ford. In Ford’s case, the ROE is only 10.82% which is not really encouraging because it can only make 10.82% out of the capital it has. It is not a wise investment because the meager 10.82% return has significant risk involve considering that Ford nearly folded during the last financial crisis if not for the government who rescued it. If I have money to invest, I would rather invest it in mutual fund or time deposit because it has lesser risk if Ford will only give me a 10.82%. The return is just not worth the risk. Return on Equity (ROE) net income/average stockholders’ equity net income = 1,631 Average stockholder’s equity = 15,071 Return on Equity = 10.82% The second important ratio that I will look in Ford would be its dividend yield ratio or dividend ratio. Dividend ratio is basically straightforward in telling how much Ford gives to its stockholder’s as dividend vis-à-vis its share in the market. It follows then that the dividend ratio will not be pleasing because the company is still recovering and therefore conservative in giving dividends. Again, the figure of dividend ratio is not that encouraging because it only gives a meager 3.81%. If I am the investor, I will put my money somewhere else where there is a higher yield ratio with lesser risk. Dividend Yield Ratio Dividend yield = dividend per share/share price Dividend per share = .41 Share price f $10.76 Dividend Yield Ratio = 3.81% I will also look on Ford’s Return on Asset ratio (ROA) if I will be considering the company for investment. Return on Asset Ratio tells the company’s efficiency in using all of its available resources to generate a profit. This ratio is important because it provides a hint of the competency of the organization as a whole in the highly competitive auto industry. Again, Ford does not look good from the vantage point of efficiency as its ROA is just .9%. It meant that Ford requires a lot of resources in generating income which furtherly support the other unfavorable ratios. Again, if I have money to invest, Ford is not a good investment yet because its operation is not yet ideal which explains why other ratios also do not look good. Return on assets (ROA) Net income/average total assets (in millions) Net income for third quarter = 1,631 Average total assets = 179,248 ROA = 1,631/179,248 Return on Asset ratio = .9% 3. Based on your analysis of the key ratios, describe the strategies you would recommend to Ford’s management team to improve its financial performance. Explain your rationale. Based on my analysis of the key ratios selected, I can deduce that Ford’s Balance Sheet and Income Statement do not look good. It is understandable because the company just came from a financial crisis where it almost went bankrupt that the government has to intervene just to save the company. Of all the aspects in the company, Ford definitely needs to improve on its efficiency because its ROA ratio looks miserable and tells that its operation requires a lot of resources just to generate income. To achieve this, cost must be reduced to increase the income component of the company and one of the measures that the company can implement to reduce cost significantly is by relocating production to a more cost effective location such as Asia. The savings in moving to a more cost effective production can be translated to income thus improving its ROA ratio because it now requires fewer assets just to generate the same income. If the income side will be fixed or increased, the ROE will also improve from a mere 10.82% because the company will be able to generate more income out of its available capital. But cost is not the only factor that needs to be improve, the dismal ratios such as in ROE can also be attributed to relatively low sales (albeit it is positive compared to previous years) and this needs to be attended to. This may be done by aggressive marketing by exploring markets to increase the revenue of the company 4. Evaluate how the refusal of the federal government’s “Bail Out” fund may have impacted Ford’s financial performance negatively and positively. 118 Ford received two trunches of bail out fund from the government albeit the second batch was not characterized as a bail out, but still a money from the government that helped strengthened its market position. Ford was the biggest recipient of government bail out fund. It received two-thirds of the $8.8 billion loaned under the department’s Advanced Technology Vehicle Manufacturing program. Congress appropriated $25 billion for that program in late 2008, during the waning days of the Bush Administration, around the same time the auto company CEOs were getting grilled on Capitol Hill (Muller, 2012). The bail out fund helped Ford survive the financial crisis in 2008-2009 and enabled it to embark on a modernization drive to produce “cleaner” and “more compact” vehicles that strengthened not only its present market position but also its market prospect in the future as it had a good Research and Development program. The downside of it is that Ford’s liability increased and will have to pay for it in the future. But considering that the bail out literally saved the company from bankruptcy, the downside in negligible compared to the benefit that Ford derived from the bail out. References Muller, Joann (August 29, 2012). Automakers Report Card: Who Still Owes Taxpayers Money? The Answer Might Surprise You. Retrieved from http://www.forbes.com/sites/joannmuller/2012/08/29/automakers-report-card-who-still-owes-taxpayers-money-the-answer-might-surprise-you/ Needles, Belverd E. (2011). Principles of Financial Accounting (11th ed.). Independence, KY, USA. Cengage Learning. Raiborn, Cecily A. (2010). The Corporate Income Statement and Financial Statement Analysis. Hoboken, NJ, USA. John Wiley & Sons. Smith, Barry (2010). Introductory Financial Accounting. Berkshire, GBR. McGraw-Hill Education Read More