Business Analysis- Ford Motor Company

Topics: Ford Motor Company, General Motors, Balance sheet Pages: 8 (2412 words) Published: June 12, 2012
Business Analysis Part III

Nancy Holly

MGT/521 Management

January 27, 2012

Jim O’Keeffe, Facilitator

A financial analysis of Ford Motor Company’s (Ford) statements will identify their solvency in today’s automobile market. Elements such as liquidity, leverage, profitability, and activity ratios will demonstrate Ford’s financial health and stability. A further assessment of their technological advantages, global strategies, and benchmarking analysis will indicate the future prognosis of this company. Business Analysis Part III: Ford Motor Company

Ford Motor Company: Strategic Initiative
Liquidity Ratios
Managers frequently use liquidity ratios to measure a company’s financial status. Banks and/or creditors particularly find interest in this analysis because liquidity ratios measure a company's ability to convert assets to cash to pay short-term debts, debt that a company will be able to pay within one year. According to the Federal Deposit Insurance Guidelines (2012), “Liquidity represents the ability to fund assets and meet obligations as they become due. Liquidity is essential in all banks to compensate for expected and unexpected balance sheet fluctuations and provide funds for growth. Liquidity risk is the risk of not being able to obtain funds at a reasonable price within a reasonable time period to meet obligations as they become due. Because liquidity is critical to the ongoing viability of any bank, liquidity management is among the most important activities that a bank conducts.” Therefore, banks monitor the liquidity assets of organizations for funding purposes. The equation to determine a liquidity ratio is the company's current assets (cash, accounts receivables, notes receivables, inventory, etc.) divided by the company’s current liabilities (accounts payable, notes payable, accrued taxes, accrued salaries, etc.). A review of Ford Motor Company’s (Ford’s) September 2011 Balance Sheet revealed the following information about the company’s liquidity: Current ratio = Current assets /Current liabilities

Current ratio = $129,555,000/$60,365,000 = $2.1
[Current assets for every $1 of current liabilities]
Acid-test ratio = Cash +Accounts receivable + Marketable securities /Current liabilities Acid-test ratio = $16,460,000 + $76,825,000 + $29,058,000/$60,365,000 = 2.0 [0.5 – 1.0 is usually considered satisfactory, but bordering on cash flow problems]

Ford’s current ratio test reveals that the company has $2.1 current assets for every $1 of current liabilities, and that an acid-test ratio of 2.0 reveals that Ford has a cash flow problem and they might have to consider more costly long-term funding options. Further analysis will compare Ford’s current ratio to General Motor Company’s current ratio (“,” 2012). Leverage Ratio

An organization’s debt ratio will show how much debt a company has and how much a company relies on bank loans or other borrowed funds. The debt ratio will also reveal a company’s ability to pay off short-term debt. A mutual fund manager will find a company with high debt to be more of an investment risk. A review of Ford’s September 2011 Balance Sheet revealed the following information about the company’s debt and ability to pay short-term debt: Debt to owners’ equity ratio = Total liabilities/Owners’ equity = $156,758,000/$5,982,000 =2,620%

Ford’s debt to owners’ equity ratio of 2,620% appeared extraordinary; however, upon calculation after calculation, this appears to be the correct assessment. Upon comparison of Ford’s total liabilities ($156,758,000) to their Owner’s equity ($5,982,000), the span is vast. Ford has a tremendous amount of debt, and not as much equity in relation to the amount of debt. Further analysis will compare Ford’s debt ratio to General Motor Company’s debt ratio to identify any trends in the automobile industry (“,” 2012). According to (eHow, 2012) , a...
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