Ford - Financial Performance Analysis - Example

Ford: Financial Performance Analysis Introduction Ford motor company is one of the leading car manufacturing firms in the automotive industry (Ford Annual Report, 2014). Ford, which is based in Dearborn, Michigan, performs two different activities; first it manufactures cars besides distributing them in all continents except for Antarctica; the firm employs more than 187,000 employees including 62 car manufacturing plants in different parts of the world; besides manufacturing and assembling cars and different auto parts, the firm is also involved to providing financial services relating to motor credit (Ford Annual Report, 2014). Despite having so much recognition in the automobile industry, the financial performance through the analysis of ratios signifies a different story about the actual financial position and performance of the firm over the period of last three years. In the following parts of this paper, gross profit ratios, net profit ratios, return on equity, return on capital employed (ROCE) and debt equity ratios have been graphed and evaluated before the conclusion part and they have been compared with the similar results of Audi, a Germany-based automobile firm. Analysis Graph 01: Ford and Audi Gross Profit Comparison Source: (Author’s own computation) Gross profit is considered to be one of the main indicators of the financial performance of a firm. Gross profit is computed by deducting cost of sales with sales and the remaining amount is divided with the sales. This ratio is important because it provides the basic understanding that whether a firm has appropriate remaining funds to satisfy the operating expenses, such as salary expenses, heating and lighting and other parameters. Financially, the graphs depict the decreasing performance over the period of last three years. Ford records 4.32 per cent gross profit in 2012 and in the subsequent year this percentage did not remain the same but diminished to 3.73 per cent, recording a decrease of 0.59 per cent in the year of 2013. Subsequently, this decline did not stop but continued in the following year in which the firm recorded only 2.39 percent gross profit which is 1.34 per cent less than the previous year’s gross profit, clearly demonstrating that Ford is not financially performing better during the reported period. In this regard, it is appropriate to highlight that 2012’s gross profit has been the highest whereas the year of 2014 recorded the lowest level of gross profit. This signifies that Ford has some serious issues with its basic profitability ratios. Comparative analysis reflects that Audi has generated more gross profit than Ford during the reported period. In 2012, Audi has accounted for 19.94 per cent gross profit whereas in the same year Ford has only reported 4.32 per cent, clearly demonstrating that Audi has been largely successful in generating more gross profit. At the same time, in the subsequent years, the gross profit ratio comparison depicts that Audi has produced more gross profit than the competitor Ford. In this regard, it is important to mention that during this entire reported period, Audi has largely been able to generate more than 15 per cent gross profit. This level of difference clearly highlights that Audi has largely been able to generate more attractive sales revenue. Graph 02: Ford and Audi Net Profit Comparison Source: (Author’s own computation) Net profit exhibits the final financial performance of a firm. This is computed when all expenses are deducted from sales revenue and the remaining amount is available either for transferring into the retained earning section or announce dividend to the shareholders of the firm. In other words, this financial barometer is the single important indicators for representing the financial performance in a single numerical depiction. Ford’s net profit ratio is also demonstrating and telling the similar story which is being reflected by the graph 01. In the year of 2012, the firm recorded 4.2 per cent net profit. However, in the subsequent year, more improved net profit was posted in which Ford announced 4.89 per cent net profit, which is more than the net profit of the previous year-2012. Subsequently, the firm was unable to maintain the trend reflected by the past two years because Ford posted 2.2 per cent net profit which is substantially less than the net profit of the previous years. In this regard, it is important to mention that the two extraordinary items have mainly contributed to the net profit growth in the year of 2013. For example, in that year, Ford experienced a considerable increase in the Automotive interest income ad other income; in that year, Ford accounted for $ 974 million in automotive interest income and other income whereas in 2014, this income was only $76 million, clearly demonstrating the impact of this income on the net profit. However, it is relevant to mention that this single increase can be considered as an important financial activity because it is additional income which largely relies on the numerous external factors which are mostly beyond the control of Ford management. Audi has outperformed Ford. In 2012, Audi has reported 8.92 per cent and Ford has only provided 4.2 per cent net profit. In the subsequent years, Audi has generated 8 percent, 8.23 percent in 2013 and 2014 respectively whereas in the same years 4.89 per cent and 2.2 per cent respectively. Based on this, it can be deduced that Audi has largely been able to generate more than 50 per cent net profit in the reported period. Graph 03: Ford and Audi Return on Equity Comparison Source: (Author’s own computation) Return on equity is also an important financial ratio. First, this ratio takes into account profit before interest and tax and divides this with the amount of equity. In other words, this ratio explains the contribution of shareholders’s equity for generating profit. The higher the return on equity, the more profit will be shared with the shareholders. Ford’s return on equity has not bee impressive over the course of last three years. In 2012, the firm recorded 35.43 per cent return on equity which is considered to be appropriate given the type of industry in which Ford is currently operating. However, in the subsequent year, the firm was unable to maintain the similar trend but declined in the year of 2013. In that year, Ford posted 27.47 per cent return on equity. When this figure is compared with the previous year’s figure, it can be easily deduced that a decline of 10.96 per cent has been observed in a single year. Similarly, in the year of 2014, 12.8 per cent return on equity has been provided which is around fifty per cent less the return on equity figure which was posited in 2013, demonstrating that the shareholders’ investment is not generating effective return for the shareholders. There are numerous causes which have contributed to this situation. First, Ford has accounted for the lowest income before income taxes in the year of 2014. In other words, in 2012 and 2013, the firm’s management was able to generate more income for the shareholders. In this regard, it is relevant to highlight that the despite the fact that 2014 equity was less than the 2013 equity, the firm has recorded the lowest return on equity in the year of 2014 and that clearly hallmarks that the firm is really struggling to generate more revenue but has not been able to do so. Ford has outperformed as far as return on equity is concerned. In 2012, Ford has generated 35.43 per cent RoE whereas Audi has only produced 28.96 percent; this shows that Ford has increased more return during in 2012 and 2013. On the other hand, Audi has generated 23 per cent of return whereas Ford has provided 12.8 per cent in the year of 2014. Graph 04: Ford and Audi Return on Capital Employed (ROCE) Comparison Source: (Author’s own computation) Return on Capital Employed (ROCE) is computed by dividing profit before interest and tax with total assets minus current liabilities. And the appropriate ROCE benchmark is that the higher the ROCE the more better will be financial performance. In this regard, it is worth mentioning that there are more than one way to compute the ROCE. However, after reviewing the Ford annual reports, it was more reasonable and appropriate to use total assets minus current liabilities for computing the ROCE. Overall, the Ford ROCE has been constantly declining during the reported period. In 2012, the firm recorded 4.46 per cent ROCE which is the highest ROCE when it is compared with the ROCE of 2013 and 2014 as well. In the year of 2013, and 2014, the firm posted 3.86 and 2.3 per cent ROCE respectively, clearly demonstrating that Ford did not generate enough income before interest and taxes in the year of 2014. Additionally, Ford experienced a reasonable increase in its total assets in 2014. For example, when compared with the total assets of 2013, it can be easily observed that the year of 2014 provided more assets. More clearly, the firm generated $208, 527 million total assets whereas the year of 2013 recorded the total assets of $202,179 million. This clearly highlights that the firm has increased its number of total assets. On the contrary, it has not been able to use them effectively for generating more return during the reported period. In a comparative analysis, Audi has outperformed Ford during the reported period. In this period, Ford has reported 4.46 per cent, 3.86 and 2.3 percent in 2012, 2013, and 2014 respectively whereas Audi has provided 14.75, 11.79 and 11.8 per cent in 2012 and 2013 and 2014 respectively. This shows that Audi has created more return, showing that Audi’s financial performance has performed more better than the financial performance of Ford. Graph 05: Ford and Audi Debt Equity Ratio Comparison Source: (Author’s own computation) This ratio is based on a particular benchmark. This benchmark states that the lower debt equity ratio will indicate that the firm is experiencing stable business whereas the higher debt equity ratio signifies that the firm is considered to be risky as it has obtained more debt for financing its long term business needs. When this benchmark is applied to the current performance of Ford, it can be easily deduced that the existing management is not running the firm in a productive way. The graph 05 clearly demonstrates that the firm uses more debt for financing its business needs. In 2012, the firm’s debt equity ratio was 657.064 per cent and 438.61 and 479.91 per cent was recorded in 2013 and 2014 respectively. This clearly highlights that the firm has been attempting to decrease its current equation between debt and equity in which debt is highly involved to financing the business activities and long term business projects. In 2012, the firm was heavily geared as it mostly relied on the use of debt. However, in the subsequent year, this reliance considerably diminished and consequently, the firm experienced a substantial decline in debt equity ratio. In the subsequent year, the firm was unable to maintain this tendency instead it recorded more debt to equity ratio in the year of 2014. Ford is highly geared during the reported period in a comparative analysis. This shows that Ford has more relied on the debt for satisfying the requirements of strategic needs of business whereas Audi has largely controlled its debt level and has largely been successful in retaining the moderate level of debt equity ratio. Conclusion Financially, Ford has been unable to generate effective financial performance over the period of last three years. In order to evaluate the financial stability and financial performance, a three year performance analysis highlights that the main financial indicators clearly highlight that the firm has not been able to control its expenses and improve its revenue over the course of last three years. During this reported period, it has been observed that the major financial ratios have been declining or struggling to retain their current position. For example, the gross profit ratio’s overall trend highlights a declining trend as the firm records the lowest gross profit ratio in the year of 2014, clearly establishing that the firm is not generating enough revenue to meet its cost of sales. At the same time, it has also been observed that the net profit ratio has also been diminishing during the reported period except for 2013 in which the firm posts the highest net profit of 4.86 per cent which is mainly contributed by the supplementary income. Additionally, the return on equity did not perform differently from the gross profit ratio in the same period. Aggregately, the return on equity trend is diminishing, clearly indicating that the firm is not generating enough profit for distributing to its shareholders. Comparatively Audi has performed better than Ford. For example, in terms of gross and net profit, Audi has considerably generated more attractive and stable indicators than the one provided by Ford. And the same is also applicable to the ROCE. At the same time, Ford has heavily relied on the debt for supporting its long term strategic needs whereas Audi has avoided using the support of debt. On the other hand, in 2012 and 2013, Ford has provided more return on equity when it is compared with the Audi’s return on equity. References Ford Annual Report, (2014). Delivering Profitable Growth for All. Available: http://corporate.ford.com/investors/reports-and-filings/annual-reports.html#/undefined Accessed: 13 May, 2015 Ford Annual Report, (2012). Delivering Profitable Growth for All. Available: Available: http://corporate.ford.com/investors/reports-and-filings/annual-reports.html#/undefined Accessed: 13 May, 2015 Audi Annual Report, (2014). We Create Tomorrow. Available: http://www.audi.com/corporate/en/investor-relations/financial-reports/annual-reports.html Accessed: 18 May, 2015 Audi Annual Report, (2012). We Create Tomorrow. Available: http://www.audi.com/corporate/en/investor-relations/financial-reports/annual-reports.html Accessed: 18 May, 2015 Read More