Financial Ratio Analysis Paper

Dehlia Lopez

FIN/575

March 25, 2010

University of Phoenix

Financial Ratio Analysis

Ford Motor Company is one of the automotive industries largest and most successful auto makers with more than 164,000 employees and seventy manufacturing plants world wide, (Ford Motor Company, 2013). The firm is led by President & CEO, Alan Mulally who drives with a ”One Team, One Plan, One Goal, One Ford business strategy for achieving success”, (Ford Motor Company, 2013). Throughout this paper, Learning Team B will explore the financial condition of Ford Motor Company based on the following financial ratio calculations; · Profitability ratios

· Liquidity ratios

· Activity ratios

· Solvency ratios

In addition to the calculations, Learning Team B will provide a synopsis of the firm’s debt, cash availability, asset usage, profitability as well as a review of the firm’s ROE, leveraging the DuPont method. Profitability Ratios

Profitability ratios articulate the overall profitability of a company. Sales and revenue for the company may be high but if the company is spending large amounts on expenses and taxes the profits for the company may be low. Profitability ratios include: • Return on equity (ROE) – the amount of income represented by the owner investment. Ford Motor has a ROE of 35.5%. • Return on capital (ROC) –the percentage of the company net income generated outside the capital readily available by the company. Ford Motor has a ROC of 2.97%. • Net profit margin (NPM) – the primary profitability ratio that states the percentage of each dollar of sales remaining after paying costs and income taxes. The result of net profit margin is the bottom line for the company. Ford Motor has an NPM of 4.22%. • Operating profit margin (OPM) – the percentage of each dollar of sales that remains after paying all expenses excluding income taxes. Ford Motor OPM is 4.7%. • Tax rate (TR) – the percentage of each dollar of profit owed to the organization’s respective taxing authorities (Callahan, Stetz, & Brooks, 2007, p. 30). Ford Motor TR is 26.63%. • Gross profit margin (GPM) – the percentage of profit derived on each dollar of sales after paying for the cost of the sale but before operating expenses, interest expenses, and income taxes. Ford Motor GPM is 16.1%. • Operating Expense Ratio (OER) – the percentage of each dollar of sales used in paying for the organization’s selling, general, and administrative expenses. Ford Motor OER is 9.1%. Ford Motor Company Profitability

After completing the calculation for Ford Motor Company it is noted that the company has a gross profit of 16.1 that represents a profitable company. The return on capital under 5% shows that the company has a high debt ratio. Ford Motor generated $.0242 of operating profits for every dollar of its invested assets. In 2012 Ford Motor Company’s profitability ratios are listed in the table below. Return on Equity Ratio=Net Income

Average Stockholder’s Equity=$5,665,000

$15,947,000=36%Return on Capital Ratio=Net Income

Aver. Debt + Aver. Stockholder’s Equity=$5,665,000

$190,554,000=2.97%Net Profit Margin=Net Income

Sales=$5,665,000

$134,252,000=4.22%Operating Profit Margin=Income from Operation before taxes Sales=$6,291,000

$134,252,000=4.68%Tax Rate =Income Taxes

Net Income Before Taxes=$2,056,000

$7,720,000=26.63%Gross Profit Margin=Gross Profit

Sales=$21,674,000

$134,252,000=16.1%Operating Expense Ratio=Selling, General & Admin. Exp Sales=$12,182,000

$134,252,000=9.1%

Liquidity Ratios

Liquidity ratios are used when assessing a company’s ability to meet short term debts and commitments. Calculating liquidity ratios for any organization will reveal the number of times short-term debt obligations and commitments are fulfilled using cash and...