Ford Market Analysis


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Ford Market Analysis

  1. 1. Financial Analysis Consulting Report for Ford Motor Company Prepared for: Professor Fred Wolf, Busa 302, Pacific Lutheran University By: Alf Joachim Vennatro Daniel Lessard Richard Cline Tuan Phan 2
  2. 2. Pacific Lutheran University MCLT Room 124 Tacoma, WA 98447 Professor Fred Wolf Assistant Professor of Business / Executive in Residence School of Business PLU 12112th Park Ave. S Tacoma, WA 98447 May 25, 2007 Dear Professor Wolf, Please accept the accompanying Financial Analysis Report of Ford Motor Company. This report is the result of research done on the financial statements and analysis performed on the figures to present the knowledge the Ford Motor Company Group obtained during our work and progressions through this course. Through this course we were given the opportunity to create and analyze financial statements and ratios in terms of what they mean for investors and companies in order to expand our knowledge on how to manage companies successfully. The Ford Motor Company group would like to thank you for you guidance through this course and for the skills you gave us to critically examine our own investments. We hope this report will show how we have grown during the course in both our ability to manipulate the statements and also interpret for ourselves what they mean. Sincerely, The Ford Motor Company Group; Dan Lessard, Richard Cline, Alf Vennatro and Tuan Phan 3
  3. 3. TABLE OF CONTENTS Executive Summary …………………………………………………………. 4 Introduction / Background …………………………………………………. 5 Financial Statement Analysis Balance Sheet Analysis ………………………………………………. 6 Statement of Income …………………………………………………. 12 Statement of Cash Flows …………………………………………….. 14 Ratio Analysis ………………………………………………………………… 15 Liquidity ………………………………………………………………. 15 Profitability …………………………………………………………… 16 Activity ………………………………………………………………... 17 Proforma Analysis …………………………………………………………… 18 Recommendations …………………………………………………………… 20 Appendices References 4
  4. 4. Executive Summary Executive summary Ford Motor Company has over the last 5 years had a negative development in their financial statements, with red numbers in their net income, a negative working capital and covering debt with debt financing. With several years of bad performance the Ford Motor Company has had a lot of sales, in 2003 to 2005 they had a positive net income, but in 2002 and 2006 they had a negative net income. Even with the bad results the union agreements are still in place to keep the wages of the employees high and keep the costs of Ford up. Because of the high costs of making the cars that Ford produce (not just the cost of employees) their cars are sold with little or no profits. Ford’s debt has been steadily increasing over the years, when Ford is using debt financing to pay of debt when they do not have any cash to pay down existing loans, their liabilities are increasing. Ford’s debt is ten times their shareholders equity. Because of these poor results Ford’s financial ratios are small or negative. Ford is not doing well in the market. They are loosing market shares and money on their day to day operations. Ford has reached the point in their growing period that they are in their decline. So taking on debt to continue growing is at this point useless. Ford management should consider to sell of some of the less profitable companies that they own to cut down the losses in the company, also to cut down on their workforce to cut down costs in their main factories. Another possibility is to cut down on the number of models they are producing for their Ford brand. Concentrating on a few models that people like, cutting down on the costs of that model while at the same time increasing the quality of that product would attract more customers to the Ford brand and increase their revenue. The Ford stock price has over the last year been cut in half in value by the market, the market does simply not have any faith in that the management can turn Ford around on the time table they have set for the changes. 5
  5. 5. Welcome To Ford The Ford Motor Company generates its money through two different sectors: Automotive and Financial Services. Automotive sector’s revenue, income and cash are generated primarily from sales of vehicles to its dealers and distributors. Vehicles the company produces generally are subject to firm orders from its customers and are deemed sold immediately after they produced and shipped to its customers. Most of the vehicles sold to its dealers and distributors are financed at wholesale by Ford Credit. Ford Credit pays cash to the relevant legal entity in its automotive sector in payment of the dealer’s obligation for the purchase price of the vehicle. The dealer then pays off the wholesale finance receivable when it sells the vehicle to a retail customer. The Financial Services sector’s revenue is generated primarily from interest on finance its money to these dealers. The Ford Motor Company was known to its original business model of “affordable care for everyone”. From the beginning of the Model T, which was only available in black color, the company had made its statement clear in producing car for everyone. However, in the early 20th century, the automotive industry has been very competitive dues to the raising in both domestic and foreign auto makers join the United States market. As the result, Ford needed to change its business model, but faced many challenges as competitors came through with distinctive designs and quality. In this report, we only look at the financial side of the company. We analyze the strengths and weaknesses based on the most current financial statement of Ford. So we can come up with different recommendations and suggestions to Ford a better company financially. A Little Background To Our Company Ford Motor Company entered the business world on June 16, 1903, when Henry Ford and 11 business associates signed the company's articles of incorporation. With $28,000 in cash, the pioneering industrialists gave birth to what was to become one of the world's largest corporations. The company went public and, on Feb. 24, 1956, had about 350,000 new stockholders. Ford Motor Company, a global automotive industry leader based in Dearborn, Michigan manufactures and distributes automobiles in 200 markets across six continents. With about 300,000 employees and 108 plants worldwide, the company’s core and affiliated automotive brands include Ford, Jaguar, Land Rover, Lincoln, Mazda, Mercury and Volvo. Its automotive-related services include Ford Motor Credit Company. 6
  6. 6. Balance Sheet Analysis: The balance sheet for any company represents a snapshot in time of the current situation of their Assets, Liabilities and Equity. The consolidated balance sheets for Ford Motor Co. for the last five years is shown in the appendix for reference. They show Current Assets, Inventories, Accounts Receivable, Total Assets, Current Liabilities, Total Liabilities, Shareholders Equity and Total Long Term Debt – numbers that are vital to the ratio analysis provided to you, the investor, in this report. From the Balance Sheet you find an analyze many important values and ratios that show the ability of the company to service its obligations. Among those values that can be determined are the book value of the company, the working capital, how much total debt there is and along with that the leverage taken on by the company. You can see whether the company is growing, and by how much, or if they are not, and by how much they are losing. You can also analyze whether their debt is increasing or decreasing and make assumptions as to the reasons for it. The modified balance sheet shown above shows the integral numbers used in the ratio analysis found later in this report and in the appendices. In order to present a good analysis of the last five years in this report the balance sheet and the statement of cash flows sheets had to be cut down to size to conserve space. Directly below are quick explanations of the terms used in the modified balance sheet. Assets / Current Assets: Assets are items that we have in our ownership that are or can be converted to cash. The asset figures depicted in the balance sheet for Ford Motor Co. are those from the Consolidated Balance Sheets of the rather than the Sector Balance Sheet for clarification. Current Assets are those particular assets that are expected to be converted to cash within one year; Cash and Cash Equivalents, Marketable Securities, Receivables and Inventories. The Acid Test Ratio, discussed below, is the current assets less inventories divided by current liabilities. This shows that while inventories is typically considered a current asset, it is frequently illiquid and, therefore, cannot be considered an asset that can quickly help in a distress situation. 7
  7. 7. Liabilities / Current Liabilities Liabilities are those moneys or debs owed to certain creditors. Liabilities are essential in calculating the current ratios, quick ratios, determining the obligations of the company and determining how much available assets the company has to use. As with assets, Current Liabilities are those liabilities that are owed within one year. These liabilities include Accounts Payables and Accrued Liabilities. Shareholders Equity The Shareholders Equity is the difference between the companies Total Assets and Total Liabilities. Shareholders Equity is the total number at which the company is financed through common and preferred stock, and also represents the book value of equity of the company. The book value of the equity is not the current value of equity, however, it is the historic value because it comes from the Balance Sheet, the snap shot in time of the companies performance, not the stock market, which gives more up-to-date valuation. Book Value of the Company The book value of Ford Motor Company from 2002 – 2004 is a respectably increasing number. The book value increased by an average of five billion dollars per year during those three years and another one billion dollars, a smaller increase yet an increase nonetheless, for the years 2004 – 2005. The year 2006 , however, was reported in the negative numbers at $ (3,465) million dollars. The negative book value of equity shown in the Ford Motor Co.’s balance sheet is primarily based upon the retained earnings reported during the 2006 year. Retained Earnings are the excess profit retained from the company’s operations. Many firms, as well as For Motor Co., distribute their retained earnings in the form of dividends to their investors. From 2002 – 2005 the retained earnings of Ford Motor Co. were as fallows (respectively): (numbers are in millions) $ 5,590 - $ 11,651 - $ 16,045 - $ 12,957 As you can see, the 2006 retained earnings is no less than $ 15 million from the 2005 retained earnings, and even more from the 2004 retained earnings. The drop in retained earnings can mean many things for a company, but it is possibly one of the most important figures an investor should look at when deciding whether or not to invest in the company, because one might see the company’s primary duties as making a profit for their customers, and a negative retained earnings is exactly the opposite of that (instead of being called a retained earnings, they are known as an accumulated deficit). Accordingly during 2006 Ford dropped their cash dividends from $ .40 to $ .25 to accommodate the accumulated deficit. How much working capital is there? Working capital is a measurement of a company’s efficiency and health in the short term. It is utilized the Current Assets less the Current Liabilities, and a positive answer is an indication of a company’s ability to pay off it’s short term liabilities. If the answer is negative, however, is an indication of the company’s inability to service its short term liabilities. 8
  8. 8. Ford Motor Co. shows a negative working capital for the last five years with no indication of entering the positive as can be seen by viewing the working capital ratio chart in the Appendix of this report. As will be discussed below, a negative working capital trend can be an indication of declining sales, which can also be a possibility for the negative retained earnings discussed above. The decline in sales can typically mean there is also a decline in Accounts Receivable while the Accounts Payable either remain relatively constant or increase, creating the distance between the current assets and the current liabilities, and, thus, creating a smaller working capital ratio. A trend in the Ford Motor Company is the decline in the numerical values during the 2005 and 2006 years. The working capital ratio declined from $ (10,500) in 2004 to $ (46,500) in 2005. This drop in working capital is suggestive of a decrease in sales, which would also possibly help explain the loss of retained earnings that occurred between 2005 and 2006. How much debt is there? Debt on the balance sheet is measured in the Liabilities section. As shown in the balance sheets for the last five years for Ford Motor Co. the debt has remained relatively constant, with an average debt of $ 276,500. There are two “outliers” in the data in years 2003 and 2005, however, they do not constitute a dramatically sufficient change in the value of the debt for further analysis. To see the debt as compared to assets and other figures, see the ratio analysis later in the report. What is Ford Motor Co.’s Leverage? Financial leverage is basically the use of debt to increase the expected return and the risk to the equity of a company. The more risk a company takes on means the greater potential return on their investments. However, conversely, the greater risk also means the chances for bigger losses are also prevalent. Risk analysis is very important when deciding whether or not to invest in a company because you need to know how risky they are to go along with how well they can service their debt. The riskier the company, especially if they are having trouble financially, the less appealing they are to investors. The major leverage figures that are looked at on the balance sheet are the Long Term Debt compared to the Shareholders equity and the Debt compared to assets (to a smaller degree), also known as the liquidity. The Debt to Equity Ratio is discussed more at length later in this report in the ratio analysis section. Here we will briefly discuss the desired numbers and the trend at which the financial leverage For Motor Co. has operated during the last five years. The debt to equity ratio measures how much of the company’s equity is financed through creditors. The higher the risk, the more leverage they have. The debt compared to equity is displayed as a percentage of every dollar invested in the business, showing the investor that an ideal debt should be lower than the equity. This is also common sense because one should realize that to be profitable you need to have less debt than you do equity. 9
  9. 9. As you can see from the modified balance sheet provided for you at the top of this report Ford Motor Co.’s debt is over 10 times the amount of their shareholder’s equity throughout each of the five years depicted. This is not a favorable ratio at all because the smaller amount of debt you have compared to your shareholder’s equity the less risky you are. Ford Motor Co. is way too risky an investment to new investors and current owners alike. The leverage has gone beyond workable and manageable leverage, and has become burdensome. 10
  10. 10. Is Ford Motor Co. Growing? By How Much? There are four stages in the life of a company; the start – up stage, rapid growth stage, maturity stage and decline stage. The start – up stage is characterized possibly by the loss of money during the research and development stage, where the company must develop its products and it establishes its market shares. The rapid growth phase of a company is characterized by the company growing incredibly fast (as the name suggests) but they tend to grow too fast for their own good and must borrow more money than, perhaps a more mature company would have to, in order to sustain the growth of the business. The maturity phase is characterized by the company possibly generating more cash than it can effectively reinvest. This also may be partly caused by a slight decline in the growth of the company. And finally, the last stage, decline, is characterized by a decline in growth and sales, but still a sizeable generation of cash. Ford is not a company that meets any single one of those standards to classify whether or not they are in a particular stage. Ford Motor Co. is not a company in the growing stage of a business, however, they are not generating enough profits to keep the company above water so they require large amounts of plug which can, at a quick glance at the ratios, give the illusion that they may be a rapid growing company. Ford Motor Co. is not necessarily a company that is in the decline stage because, again, they are not generating enough profits to sustain themselves, however, given the 2006 sales data, the sales seem to be in a downward phase. In conclusion, Ford Motor Co. is in a rapid – decline – spiral phase where their product is not a commodity consumers want, their sales are not sufficient as their debt continues to increase, and their retained earnings took a shot in 2006. Cutting the amounts of their dividends (discussed above) could be and most likely is an indication of tougher times ahead, and it can be foreseen that more dividend cuts could be eminent. The cutting of dividends often shows worse things going on behind the curtains. Because of the problems Ford Motor Co. has been having another eminent sign of a declining stage company was shown early in the 2007 year that is not portrayed on the data in this report. Ford Motor Co. sold the Aston Martin line of vehicles to a group of private investors for $848 million. This is a sign that Ford is trying to cut its costs and get out of the red. This sale, however, is a good sign because it shows the investor that they are not trying to buy their way out by trying to sell more. They are trying to manage their costs to increase their profits or, in Ford’s case, reduce their losses. There are current rumors that Ford is continuing to look into dropping more lines of cars such as Volvo. Is their debt increasing or decreasing? Although Ford Motor Co.’s overall total debt over the past five years has remained relatively constant, staying at a level around $276,500, a broader view shows that the debt has a slightly increasing slope. The individual parts of the liabilities section of the Balance Sheet show level increases in Accounts Payable, Accrued Liabilities and Debt. A possible reason for the increasing debt shown in the balance sheets is the fact that Ford can no longer service its debt through retained earnings and profits, so they are financing their debt by borrowing more, and, subsequently, increasing their debt. 11
  11. 11. What is Ford Motor Co. worth? To find the worth of a company you must find the amount of Common Stock issued and the current price of the Common Stock. This can be found by looking at the current rate at which the company is trading at by looking at the current value on any stock ticker. By multiplying these to values together you can get the Market Value of the company. Ford currently has issued 1,837,000,000 shares of Common Stock and at close on Wednesday, May 16, 2007 the stock was trading at $ 8.76. This puts the Market Value of Ford Motor Co. (and therefore the value) at $ 16,092,120,000. Over the last five years (beginning in 2005 and going backwards) Ford Motor Co.’s Market Value has been $ 14,181,640,000, $ 26,893,680,000, $ 29,722,660,000, and $ 17,588,460,000 respectively. As we can see with these numbers the worth of Ford is almost as sporadic as the other figures we have seen with a general spike in the middle years. 12
  12. 12. Statement of Income A company’s statement of income is a report of their revenues, expenses and, using the equation revenues less expenses, their income for a specific period. Like a balance sheet, the Income Statement is a snap shot in time of a particular aspect of the businesses operations. A statement of income is made up of sales and other revenues. Then a list of a companies operating expenses, including Cost of Goods Sold, Interest Expense, Taxes and Interest expense. The expenses are then subtracted from the sales and revenues to calculate the Net Income (or Loss) the company has accrued over the specific period. Another section of the statement of income deals with the number of shares of stock, the stock price and the price of the dividends dispersed. For Ford Motor Co. the price of the dividends issued for years 2002 – 2005 was $ .40 and after a tough financial year the price dropped almost by half to $ .25. Sales The sales section of the Income Statement are made up of all the sales throughout the given period. As is shown in the modified statement of income above there is a section for credit sales per day. This was calculated by taking the total sales and dividing it by 365 because the original figures were based of the annual reports for Ford Motor Co. and, as such, there are 365 days in a year. If the numbers had come from a quarterly report the sales would have then been divided by 92 (365 / 4). Many ratios discussed below deal with values from the Income Statement, and most of them involve using the sales number. The Profit Margin ratio is one of the most important because, out of the sales made, it determines the amount of profit made on each dollar of sales generated in the business. Expenses The expenses section of the Income Statement shows the different expenses that are allotted during the fiscal period. One of the most important expenses to pay attention to is the Cost of Goods Sold (COGS). The COGS is the sum of all of the costs required to acquire and prepare the goods for sale. A look at the COGS for the years 2002 – 2006 shows a steadily increasing number, and, compared to the revenue which is a steadily decreasing number, it helps to create negative net incomes (or losses). 13
  13. 13. Net Income Net Income is simply the total revenues minus the total expenses of the business. Plain and simply Net Income is the total amount of earnings the business has after they account for all the outflows of money. As shown in the modified Income Statement the Net Income / Loss is sporadic throughout, and, along with looking at the balance sheet from the section previous, the 2006 year yielded a negative retained earnings which makes sense with a negative net income. Profitability A big question for investors is whether or not a company is profitable, and by analyzing both the balance sheets and the income statement it is clear to see that Ford Motor Co. is having trouble maintaining their profitability, and recent actions and reports have not encouraged investors. Ford’s Net Income for the year 2006 was over $ 14 billion dollars less than their income a year before, and over $ 13 billion less than the last four years combined. There can be many reasons for this. The first is the declining sales and consumer desire. Just this year Ford will be passed by Toyota, a foreign auto-maker slowly grabbing hold of the U.S. automotive industry, as one of the top most competitors in the United States. Toyota’s release of their new pickup truck that rivals the size of the American pickup trucks could possibly be part of the blame for Ford’s lack of sales and profit. The U.S. consumers are looking for more reliable, more catering-to-their needs trucks. The difference between Ford and Toyota is the Research and Development abilities. 14
  14. 14. Cash Flow Statement The Cash Flow Statement is a report of the sources of cash to a business and to what the cash was used for during the period viewed. There are three main sections of Ford Motor Co.’s statement of cash flows; the cash flows from operating activities, cash flows from investing activities and the cash flows from financing activities. With these three sections you can calculate the cash and cash equivalents at the end of the period. Cash Flows From Operating Activities This section represents the cash that is generated or consumed by the productive activities of a firm over whatever period of time. Over the last four years Ford has had a cash inflow in the low $ 20 billion dollar range. However the cash inflows dropped by $ 11 billion dollars, and, as represented by the above discussion of the year of 2006, this could possibly be a projection of a large decrease in sales. Cash Flows From Investing Opportunities The net cash (used in) / provided by investing activities is the representation of how much money the company has received – or in Ford’s case lost – through their investing activities. From the years 2002 – 2004 Ford displayed an average loss in their investing opportunities of $ 24,796 billion. However, posted in 2005 Ford showed an increase in investing strategy and raised their income to $ 7,457 from investing opportunities. Cash Flows From Financing Opportunities This section represents the money either spent or made from its stocks and bonds. Included in this section are the dividend payouts, money made from sale of stock, any money spent on buying back any stocks, any money it borrowed and also any money it used to repay any previously borrowed money. From years 2002 – 2005 Ford posted an average of a $ 45,981 loss on financing opportunities. These losses are due primarily to substantial losses from short term debt and principal payments made on other debt. Comparatively those two categories are the big losers of the sections. However, in 2006, Ford posted a positive $ 15,273 billion net increase in cash flows from financing opportunities, and this could be primarily because of huge proceeds from the issuance of new debt. 15
  15. 15. Ratio analysis: Liquidity: The current ratio assesses the company’s ability to turn assets into cash within a year to meet liabilities that must be paid within a year. A higher current ratio shows a high ability to meet that debt with liquidized assets. Ford’s current ratio over the last 5 years has been growing for the first 2 years, then dropped for their 3 last operating years. This shows a drop in the ability to meet their short term debt with assets turned into cash. One of the reasons for the drop in the current ratio is that Ford has been taking on debt to finance their operations. Their increase in debt and their sales of assets to meet existing debt caused their current ratio to drop. The Acid test measures the immediate amount of cash to service the company’s short term debt. An acid test should have a result over 1 to be considered to be good, so a higher acid test shows a high ability to pay of short term debt with cash. Ford’s acid tests has been under 1 over the last 5 years, there was an positive increase in 2003 but it then dropped down during the next 2 operating years and had a slight increase in 2006. The ratio was still under 1 and showed a poor ability to service short term debt with cash. This could be for the reason that Ford has a negative working capital and does not have a lot of cash lying around to pay down debts, and taking on new debts to finance debt. The working capital is a measure of how much liquid capital the firm has in reserve to satisfy uncertainties and pay of short term debt. A higher working capital number is preferred because this shows that the firm has cash in reserve. Ford’s Working capital has been negative during the last 5 years of operations. The last 2 years of operations the negative working capital has grown substantially. Ford’s liability outweighs their assets, so any excess would be used to pay down debts. 16
  16. 16. Profitability: The profit margin is a measure of how many percent of a dollar earned that the company get to keep as a profit. In Ford’s case their profit margin was negative in 2002 and was developing in a positive manner the next three years by going to a positive one. In 2005 there was a recession in the profit margin that took it a little down, and in 2006 the profit margin plummeted down to an astonishing -8% The reason for this negative profit margin is because Ford’s expenses in producing their cars are so much higher then their income on the cars. So therefore their profit margin is a negative number, the more cars Ford sells the bigger trouble they are in. The ROA or the Return on Assets is a measure of efficiency of the company’s profits generated from their assets. Ford’s ROA has during the last 5 year operating period gone from a negative number in 2002 to a worse number in 2006 with the ROA of -2.5280%. The fact that the number is positive does not mean that this number is positive for Ford. A ROA should be a much higher number than 0.2%. A company should be between 10-15% for their ROA. Because of Ford’s net loss in these years their ROA has been a negative number and as long as they are operating with this loss they will keep having a negative ROA. The ROE in a company is a measure of efficiency and measuring their return on equity. The ROE is the amount of return per dollar spent in equity. For Ford their ROE in 2002 was a negative number, it improved over the next three years to a top of 21.7% in 2004, but dropped again in 2006 to a negative 14%. A highly profitable company should have a ROE around 20%; a healthy company should have a ROE of over 10% Ford has a bad ROE; this has to do with the fact that in 2006 they reported a negative equity. This is something that has affected the ROE greatly and before they can rectify this problem their ROE will be negative. 17
  17. 17. Activity: A company’s inventory turnover measures the number of times the company sells out their inventory per year. Ford has had a stabile inventory turnover over the last 5 years. Their inventory turnover has been around 17 to 14 times a year. The inventory turnover is what you would expect from a car manufacturer, and does not need improvements. The average collection period represents the average number of days it takes the company to collect accounts receivable. Ford’s average collection period is around 250 days to 300 days. This is an average for the automobile industry since they sell most of their products through financing to other companies and give them longer payable deadlines so they will have incentives to buy more of their product. Total asset turnover is the efficiency of use of assets by showing the resources required to support sales. Ford’s asset turnover lies stabile around 0.4 to 0.5 times. Leverage ratios: Interest coverage is the extent of available earnings to cover interest payments. Ford’s interest coverage has been on a slight increase since 2002 until 2004, after that year the coverage dropped slightly and in 2006 it dropped drastically to -0.44. The reason for the drop has been the loss of revenue for the years with low or negative interest coverage where Ford could not pay down interest or principle on their loans because of the lack of cash. Cash flow to long term debt is the ratio that measures the availability of funds to pay for long term liabilities. For Ford the cash flow to long term debt has increased for 4 years since 2002, but dropped drastically down to almost a third of the year before in 2006. The reason for this would be Ford’s negative revenues and their negative equity in 2006. Long term debt to equity measures the ability for the firm to pay down their debt with the equity that the firm has so the ability to sell everything and cover their debts with the proceeds of the sale. A lower number is better in this ratio. In Ford’s case their Long term debt to equity was 29 in 2002 then dropped down to 11.9 in 2005. In 2006 however the long term debt to equity increased to 34.4. This because of the negative equity presented in 2006. With the losses incurred in the automobile sales and the negative equity Ford would have a hard time covering their debts with equity or cash from operations. By taking on more debt to cover old debt they are setting themselves up for a hard fall. 18
  18. 18. Proforma Analysis As seen in the proforma statements in the appendecis of this report, Ford Mtor Co. requires plug in upards of $ 265,417 billion dollars. Through analyzation in our financial statements and ratios discussed earlier in this report there is not a way for Ford Motor Co. to finance this funding through retained earnings because, as of 2006, Ford does not have retained earnings to deal with. Risks Because of the place Ford Motor Co. holds in the U.S. market, many of the debtors will not subject them to anything higher than the optimal interest rate. However, if they acquired higher interest rates, because of the great amount of debt already accrued by Ford, it could amount to serious reprocussions for their cash flow. Ford Mtor Co. is quite sensitive to the tax policies because of the competition with foreign markets an increase in the tax policy on domestic vehicles will affect their bottom line. However, a increase in the imported vehicles would help generate more sales for domestic made cars. Any increase in the taxation of their operatios would further cripple their profit margin. Because Ford is not in a sustainable growth pattern every car they produce is damaging their bottom line because they have a negative profit margin. Any growth, at this time, for Ford is the wrong idea. Instead, Ford must consolidate their efforts, as stated in the recommendations section of this report, into more profitable activities. Ford is in a stage of rapid decline, as discussed earlier in the financial statement analysis section. For Ford to become marginally profitable again, they must be prepared to liquidate many of their assets and sell off excess companies they own to focus more on profitable actions. Financial Restructuring In the last five years, Ford has maintained its current ratio under 1, which means the company lacks liquidity in the sense that it cannot reduce its current assets for cash to meet maturing obligation. It must rely instead on operating income and outside financing. However, Ford made a negative profit margin in 2006, it shows to creditors that Ford does not sufficient ability to meet its future obligation. According to our forecast, it will result in more debt as it had increased over the past few years, approximately $162 billions of long term debt in 2002 to $172 billions in 2006. Continuing this direction along with interest rate in the raising, Ford will find itself buried in debt if the company continues to finance its operation from the banks. We would recommend that Ford need to change its financial policy. We find that the combination of equity financing and debt financing will help the company during this stage of the business. Ford is in the stage of maturity and possibly decline. So Ford must take advantage of its equity and attract more investors to the company. In doing that, issuing additional equity is suggested. At the same, it should reduce its long term debt balance to relieve some of the interest payment. At the same time, it opens up the capacity for future debt financing. 19
  19. 19. In order to attract more investors, Ford must maintain its cash dividends at an attractive level. By saying that, it does not mean the company should increase its dividends pay out. In fact, Ford had reduced its dividends almost in half in 2006 compare to its past two years. On the other hand, Ford encounters the negative retained earnings due to the net income loss in 2006. That explains why Ford has the negative stockholders’ equity, because it depends too much on retained earnings to make up its equity. Since this is the case, accumulated other comprehensive loss in the balance sheet must be eliminated. In the past two years, Ford reported over $10 billions reduction in its stockholders’ equity from other comprehensive loss. 20
  20. 20. Recommendations for Ford After a financial restructuring by Ford, they would need to increase their profit margin to be able to stay in business. Some of the ways they can do this are as follows; one, cut down on the product models. Stick to a few successful models and improve their quality. By improving the quality on the car they will increase the demand for it, and with only a few models to produce the product specialization would increase and quality automatically follows. Two, renegotiate with the labor unions to make the agreements that the Ford Motor Company has with the unions more sustainable for Ford, also some layoffs would be necessary for Ford when they are going to cut their costs. Because of labor union agreements Ford has an excess of workers that are taking up resources in the companies finances. By cutting down in some of these costs it would help Ford cut the costs of their production line and make their products cheaper to make and more profitable. The cut in pay and benefits will be though on the workers, but after a few years of operation their pay and benefits will go back up since the company would be doing better financially. This would also ensure the jobs of the remaining workers in the future. By cutting down on the jobs of a few people Ford can continue to employ many more in the future. The third and final point, Ford should consider to sell off some of their less productive divisions and sub brands. The sub companies that they should sell off should be the ones that are a financial strain on Ford and not the ones that is making a profit. By selling off their cash cows they are further decreasing Ford’s limited revenue flow. By getting rid of some of the less profitable departments Ford can focus on the ones that are left and start working on keeping them sustainable and profitable and turn the company around. 21
  21. 21. APPENDECIES *All numbers are in millions 22
  22. 22. REFERENCES Fortune 500 April 30th edition Analysis for Financial management – Higgins Edgar filings site *site on calendar* 23