Table of Contents
Company Overview
Ford Motor Company is an American automaker based in Dearborn, Michigan and was founded on June 16, 1903, by Henry Ford and 11 other associate investors who contributed a total of $ 28,000 as the start-up capital. The company was later reincorporated in 1919 as a family business with Henry Ford, Clara; his wife and Edsel; his son who acquired its full ownership. The company’s shares were first publicly traded in January 1956. The company currently operates through two brands which are Ford and Lincoln. Though it started from humble beginnings with the manufacture of a quadricycle as the first vehicle, it is now the fifth largest automaker in the world as well as one of the largest companies in the world. Ford Motor Company is also one of the most profitable companies that has prospered over time and is one of the few that survived the great depression. The company’s principal business includes “designing, manufacturing, marketing, financing and servicing a line of Ford cars, trucks, sports utility vehicles (SUVs), and electrified vehicles, as well as Lincoln luxury vehicles” (Reuters, 2016).
We can do it today.
For most companies, business strategy starts by having a top-level definition of what the business is aiming for (Bentley-Goode, Newton, & Thompson, 2017). Ford Motors Company has a business strategy that is aimed at ensuring the company’s sustainable development through continuous profitability. Ford’s business strategy is embodied in “One Ford plan”, which was adopted in 2007 and has guided the company ever since (Ford Motor Company, 2014). “One Ford” entails one team, one goal, and one plan. These strategies are meant to achieve success globally. One team entails the company’s mission statement which states: “people working together as a lean, global enterprise to make people’s lives better through automotive and mobility leadership as measured by customer, employee, dealer, investor, supplier, union/council, and community satisfaction” (Ford Motor Company, 2014). One plan encompasses four strategies which include: “aggressively restructure to operate profitably at the current demand and changing the model mix, accelerate development of new products our customers want and value, finance our plan and improve our balance sheet, and Work together effectively as one team. One goal entails an exciting viable Ford delivering profitable growth for all” (Ford Motor Company, 2014)
Ratio Analysis
Asset Efficiency Ratios
Inventory turnover ratio
As one of the most important asset management ratios, this ratio measures the efficiency with which the firm manages and sells its inventory. The ratio indicates a high degree of stability as it was18 times in 2014 and remained at the same level of, 18 in 2015. In 2016, it slightly decreased to 17. The firm’s inventory is fairly liquid, but the slight decrease in the final year could be an important signal that either the firm is maintaining some obsolete stock or the revenue is decreasing. Since the total revenue increased in 2017, then most probably the firm is maintaining obsolete stock. The industry inventory turnover ratio is 10.6 (CSIMarket, 2017). Comparing this to the company’s performance, the company is doing very well.
Fixed asset turnover ratio
This is an activity ratio that gauges the company’s success in using its fixed assets to generate sales. In 2014 and 2015, the firm turned over its fixed assets 3 times. In 2016, however, this ratio decreased to 2 times. The balance sheet shows that both the fixed assets as well as the total revenues increased. However, the additional fixed assets seem not to be managed efficiently enough to match the current trend. The industry turnover is 0.72 (CSIMarket, 2017). This is way below the company’s ratings and as such, the company is performing excellently.
Profitability Ratios
Profitability ratios indicate the profit generating capacity of a business. The profit earning capacity of a business is important for its sustainability (Rivera, 2016). When a company is not able to earn enough profits as required, it will not be able to stay in business since it cannot support its operations.
Gross profit margin
Gross profit margin indicates how much gross profit the firm has been able to generate for each dollar sale. The ratio shows how much a firm has left over after paying its cost of goods sold (Nelson, 2007). A high margin indicates the firm’s ability to cater for its sales and administrative costs. Results from the past 3 years indicate that the company managed a gross profit margin ratio of 8% in 2014, 12% in 2015 and 11% in 2016. It shows that the company performed at its best in 2015 and at its worst in 2014. The company has however registered a significant improvement in the year 2015 (See Table 1 for formula).
Generally, the company is managing its costs of sales efficiently as it can be seen that the ratio is increasing, apart from the year 2016 when the company had a slight decrease from 12% to 11%. A closer look at the income statement explains the decrease to be attributed to the high cost of sales in that particular year. For the three years, this year had the highest cost of revenue value and the increase in total revenue was not high enough to offset it. The 5-year average industry gross margin is 14.85% (CSIMarket, 2017). The company’s latest records are below the industry average, indicating that its profitability is below standard.
Net profit margin
The net profit margin limits the emphasis on productivity, and features the organization’s revenue generation endeavors as well as its capacity to keep operating expenses down in respect to revenue (Troy, 2012). The net profit margin is a good indicator of the firm’s prosperity and future sustenance. The firm not only needs to be efficient in its operations but also in managing its cost of finance as well as taxes so that more profit can be left to cater for future growth. The net profit margin for the company for the year 2014 was 1%, 5% for 2015, and 3% for 2016. The same trend is being recorded as with the other previously discussed profitability ratio. The first two years saw good performances in this ratio but the third year reported a sharp decrease from 5% in 2014 to 3% in 2014. The 5-year industry average is 5.13 (CSIMarket, 2017). The company’s ratio is thus below average (See Table 1 for formula).
Market value ratios
These ratios are concerned with the company’s stock price. As such, only publicly traded companies can use these ratios. They are used to determine the value of the company’s stock in the financial markets.
Earnings per share (EPS)
This ratio is important in indicating a corporation’s health as well as profitability. It answers the question of how much profit was reported for each stock. The company’s EPS has been steadily increasing from 0.24 to 0.29 and 0.61 in 2014, 2015 and 2016 respectively. This steady increase indicates a good financial health for the company (Troy, 2012). The highest increase in the three years was registered in 2016 and this shows that the company’s earnings in relation to its outstanding shares have increased. The industry value is however not provided (See Table 1 for formula).
Dividend Yield
This ratio is used by investors as a signal. A drop in the ratio may be taken as an indication of the company’s poor financial performance while an increase may be interpreted as an improving financial performance. However, this may not be true as some companies may choose to retain their earnings for growth, especially for young growing companies. Amazon is among the world’s largest as well as most successful technology companies, yet it has never paid out a dividend (Troy, 2012). For this reason, the dividend yield would be more useful if other dividend/earnings ratios are taken into consideration. The company’s dividend yield is also showing a fairly good performance. In the second year, it increased from 0.125 to 0.15 but remained the same at 0.15 in 2016 (Troy, 2012). This is a good signal to potential investors who plan to invest in the company. In the third year, the constant ratio could indicate that the company’s financial status is stable, and thus, a good prospect for investment since there is no apparent risk. The Industry dividend yield is 0.6% (CSIMarket, 2017). This is above the company’s ratio. For this reason, the company is below average performance (See Table 1 for formula).
Liquidity Ratios
Liquidity ratios indicate the company’s ability to meet its short-term obligations as they fall due. A company with a higher liquidity ratio is more capable of meeting its short-term obligations as compared to a company with lower liquidity level (Troy, 2012). However, high liquidity ratios may not always be a good performance indicator for the company.
Current ratio
The ideal current ratio that is recommended for most companies is 2:1 or 200%. While a very high current ratio indicates a healthy liquidity for the firm, such ratios may not be always preferable. A high liquidity ratio is expensive to keep up, making profitability ratios lower than they ought to (Troy, 2012). In 2014, the current ratio for the company was 658% (6.58:1), 125% (1.25:1) in 2015 and 120% (1.2:1) in 2016. These are fluctuating proportions, which are not in tandem with the ideal standards except in 2014. In 2014, the company had a very high ratio, implying that it was sacrificing its profitability for liquidity. Liquid assets such as cash being kept in the company do not earn any interest for the company. However, in 2015, this ratio sharply decreased from 658% to 125%. The figure is below the ideal ratio of 200% (2:1) (Troy, 2012). It indicates a high risk for the company since it may not have enough liquid assets to meet its short-term obligations as they fall due. In the third year, the ratio decreased even further to 120%. The continuous decrease is an indication of the company’s poor liquidity (See Table 1 for formula).
Quick ratio
This ratio is also referred to as acid test ratio. It is a modification of the current ratio as it is the proportion of the current assets less inventory, to the total current liabilities. It considers the fact that some inventory items may be slow moving or even obsolete and including them with other current assets may be misleading. The ideal quick ratio of 1:1 is considered to be satisfactory (Periasamy, 2009). In 2014, the quick ratio for the company was 619% (6.19:1), 114% (1.14:1) in 2015, and 110% (1.1:1) in 2016. The ratio was very high in 2014, surpassing the ideal standard. A high ratio indicates the company’s ability to settle expenses that arise from day-to-day activities but too high a ratio diminishes the profitability level of the company. In the subsequent two years, this ratio sharply decreased though it was within the ideal standard. This is a danger signal showing that the company’s liquidity is deteriorating and there is a risk of insolvency should the same trend continue into the future periods. However, the industry ratio is 0.45 (CSIMarket, 2017). It shows that the company has a better liquidity rating as compared to the industry (See Table 1 for formula).
Financial leverage/debt ratios
Debt to equity ratio
This ratio shows the proportion of the company’s financing that represents debtors and investors. A lower ratio of less than one indicates that the owners have a greater stake in the company as compared to creditors, implying a minimal risk of going into receivership. The ratio was 754% in 2014, 685% in 2015 and 716% in 2016. Throughout the three years, the ratios have been greater than 100% indicating that the company’s debtors have a greater stake in the company as compared to the owners. This is a very risky situation for the owners as the company has substantial financial obligations to meet, and there is a high probability that the company could be insolvent. The ratio slightly decreased in the second year but rose again in the third year. The industry ratio is 17.88 (CSIMarket, 2017). This is equivalent to 1788%? Comparing with the company, the company is doing much better (See Table 1 for formula).
Debt ratio
This ratio measures the amount of asset that is financed by the company’s owners. A higher ratio is more favorable as it indicates investors’ confidence in the company since they have a greater claim on the firm’s total worth (Periasamy, 2009). A lower ratio, on the other hand, shows that the owners have a minimal claim on the firm’s asset and the greater proportion is attributed to the company’s creditors, indicating a high risk of insolvency to the company. The ratios were: 12%, 13% and 12% for the years 2014, 2015 and 2016 respectively. These ratios are generally very low. The shareholders have a very small stake in the company, and the company’s capital structure is tilted to the debt side. The company is mainly financed by debt, indicating that there is a very high risk of insolvency for the company (See Table 1 for formula).
Table 1: Ratio Analysis
| Period ending 12/31 | Formulae | 2016 | 2015 | 2014 |
| Liquidity ratios Current ratio Quick ratio | Current Assets/Current Liabilities Current Assets-Inventory/Current Liabilities | 120% 110% | 125% 114% | 658% 619% |
| Profitability ratios Gross Profit Margin Net Profit Margin | Gross Profit/total revenue Net Profit/Total Revenue | 11% 3% | 12% 5% | 8% 1% |
| Asset efficiency/turnover ratios Inventory Turnover Ratio Fixed Asset Turnover Ratio | Total Revenue/Inventory Total Revenues/Fixed Asset | 17 times 2 times | 18 times 3 times | 18 times 3 times |
| Market Value Ratios Earnings Per Share Dividend Yield | Net profit/total outstanding shares Total Dividends/outstanding shares | 0.61 0.15 | 0.29 0.15 | 0.24 0.125 |
| Financial leverage/debt ratios Debt/Equity Equity | Total liabilities/Total equity Total equity/Total assets | 716% 12% | 685% 13% | 754% 12% |
Source: (Nasdaq, 2017).
Table 2: Ford Motors Income Statements
| Annual income statements (values in 000’s) | ||||||
| Projected income statements | Actual income statements | |||||
| Period ending | 12/31/2019 | 12/31/2018 | 12/31/2017 | 12/31/2016 | 12/31/2015 | 12/31/2014 |
| Total revenue Cost of revenue Gross profit | $163,028,000 $140,962,000 $22,066,000 | $160,149,000 $140,962,000 $19,187,000 | $154,836,000 $138,198,000 $16,638,000 | $151,800,000 $135,488,000 $16,312,000 | $149,558,000 $131,409,000 – $18,149,000 | $144,077,000 $131,903,000 $12,174,000 |
| Total Operating expenses | ||||||
| Research & Development Sales, General & Admin Non-recurring items Other operating items Operating income Add’l income/expense items EBIT Interest expense EBT Income tax Minority interest Equity Earnings/Loss Unconsolidated Subsidiary Net Income-Cont. Operations Net Income Net Income Applicable to Common Shareholders | $0 $18,069,000 $0 $0 $3,997,000 $3,574,000 $7,571,000 $1,095,000 $6,476,000 $2,189,000 ($2,000) $1,780,000 4,128,000 $2,348,000 $2,348,000 | $0 $15,850,000 $0 $0 $3,337,000 $3,574,000 $4,694,000 $1,024,000 $5,887,000 $2,189,000 ($2,000) $1,780,000 3,259,000 $1,479,000 $1,479,000 | $0 $13,903,000 $0 $0 $2,735,000 $3,574,000 $6,309,000 $957,000 $5,352,000 $2,189,000 ($2,000) $1,780,000 $4,941,000 $3,161,000 $3,161,000 | $0 $12,196,000 $0 $0 $4,116,000 $1,794,000 $7,690,000 $894,000 $6,796,000 $2,189,000 ($11,000) $1,780,000 $6,376,000 $4,596,000 $4,596,000 | $0 $10,502,000 $0 $0 $7,647,000 $1,560,000 $11,025,000 $773,000 $10,252,000 $2,881,000 $2,000 $1,780,000 $9,191,000 $7,373,000 $7,373,000 | $0 $11,842,000 $0 $0 $332,000 $424,000 $2,031,000 $797,000 $1,234,000 $4,000 $1,000 $1,275,000 $2,506,000 $1,231,000 $1,231,000 |
Source: (Nasdaq, 2017)
Based on Table 2 above, the company’s total revenue has registered an average of 2% in growth for the last two years. This trend is projected to stabilize in the first year of projection and increase to 3% in the second year and revert back to approximately 2%. The increase in total revenue is expected due to the firm’s aggressive strategy of customer satisfaction. The cost of revenue is projected to grow at 2% for the first two years and expected to remain constant due to better cost management and exploitation of economies of scale. Sales and administrative expenses are expected to grow at 14% throughout the three years. The expected growth rate is chosen as it is the average for the last two years. Interest expense is expected to grow at an average of 7%, also being the average for the last two years.
Company’s stock valuation under dividend growth model
Using the Gordon Growth Model formula, we can calculate Ford Company’s stock value, assuming a stable model.
Value of Stock = D1(k-g)
Where: D1= Next year’s expected dividend per share.
k= Investor’s Required Rate of Return.
g= Expected Dividend Growth Rate (It is assumed to be constant).
g= the dividend growth rate and is the same as the average growth rate of net income in the projected three years. 2017=$5,352,000,000. 2018 = $5,887,000,000. 2019= $6,476,000,000,000.
Increase from 2017-2018= 10%
Increase from 2018-2019= 10%
Average growth = 10%
Therefore, g=10%
D1= 0.15
k= the required rate of return is 10% +3%
Value of Stock = $0.15(0.13-0.1)= $5
The company’s current stock price is $12.58. Compared to the actual valuation of $5, the company’s stock is highly overvalued. It is thus not advisable for any investor to purchase the company’s stock at the current market price.
Recommendation
The company’s liquidity has sharply decreased over the three years, giving an indication of a poor cash flow. Its profitability increased in the first two years but decreased in the third year. In terms of efficiency, the company’s management of its assets stabilized in the first year but went down in the third year. Though the company’s market value has been increasing over the three years, its financial leverage poses a great risk to investors, as debtors have the greater stake, while shareholders account for a very minimal portion of the total asset, exposing the company to a very high probability of insolvency. Based on this analysis, I would not advise any investor to acquire the company’s stock in the current situation.
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