Ford Motor Financial Ratio Analysis

Topics: Financial ratios, Financial ratio, Ford Motor Company Pages: 7 (2536 words) Published: March 7, 2012
A well formulated financial ratio analysis report helps investors to quantify a company’s financial strengths and weaknesses and potential risks and opportunities and identify the company’s financial position. Using financial ratio analysis as a tool in conjunction with other business evaluation processes, and other company factors, is beneficial for the investors (Brealey, Meyers & Marcus, 2009). The following report will provide the investor with a clear picture of the company’s current status as well as future projection in order to demonstrate investment opportunities. Specifically, this report examined xxx Company's financial ratios and other factors using a trend table over the past five years. Return on assets (ROA) measures company earnings in relation to other resources such as shareholder’s capital plus short and long-term loans (Brealey et al., 2009). Return on assets also reports the profits a company generates for each dollar in assets and measures the intensity of the business’s assets. Specifically, lower per dollar profits results an increase of asset intensity for the company. Ford is asset intensive because this company mortgaged its assets in 2006 in order to raise $24.5 billion. Additionally, money has been reinvested into the company, which has generated earnings. In 2009 Ford also requested a one billion dollar line-of-credit from the government and a $5 billion loan from the Department of Energy in order to develop both hybrid and battery powered vehicles and retool plants to produce smaller cars. Compared to the industry index, Ford is 0.7% higher than the industry average in this area. In fact, Ford was in a better financial position than GM or Chrysler and did not need bailout money nor did Ford want their competitors to gain the upper hand (Ford Motor,2010) Return on equity measures a company’s profitability by revealing on the balance sheet how much profit a company generates using the money shareholders have invested. A high return on equity ratio indicates high profit returns for investors. This ratio demonstrates to investors how effectively their money is reinvested as capital (Brealey et al., 2009). Ford demonstrated a reasonable turn around on equity in 2009 and was slight higher than the industry standard in this area.

Return on investment (ROI) measures the efficiency of an investment compared to other similar investments. Return on investment is a useful metric tool because of its simplicity. For example, if an investment does not have a positive ROI, it is not considered a good investment. This ratio compares where the company generates profits and utilizes assets. A high ROI indicates that assets are used effectively (Brealey et al., 2009). Ford experienced a major increase in ROI in2009 compared to the previous four years from 2005 to 2008. Ford’s 2009 ROI was slightly higher than the norm for the industry. Additionally, the Cash for Clunkers Bill, a government sponsored program, increased Ford’s in the United States (Ford Motor, 2010). A higher gross margin above other companies or the industry as a whole indicates that the company is operating efficiently because the higher the percentage, the more the company retains on each dollar of sales, contributing to its other costs. The gross margin is a company's total sales revenue minus cost of goods sold divided by total sales revenue and is expressed as a percentage (Brealey et al., 2009). Ford's consistency in this ratio demonstrates the company's stability. The company is also consistently ahead of the industry, further indicating Ford's high efficiency rate. The operating profit margin is expressed as a ratio that measures the proportion of a company’s revenue that is left over after paying for variable expenses such as the raw materials and salaries. The operating profit margin is considered the company’s price strategy and operating efficiency because a company must be able to pay for fixed cost such as...

References: Brealey, R. A., Meyers, S. C., & Marcus, A. J. (2009). Fundamentals of Corporate Finance (6th ed). New York: McGraw-Hill.
Ford Motor Company. (2010). Retrieved from
The North America Automotive Sectors. (2006). A Company and Industry Analysis. Industry Report - Automotive. Retrieved from
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