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Ford motor company

Ford Motor Company

GROUP PROJECT

ACC 505 - FINANCIAL ACCOUNTING 12/01/96

TABLE OF CONTENTS

DESCRIPTION PAGE

INTRODUCTION........................................................1

LIQUIDITY...........................................................1-3

Working Capital...................................................1

Current Ratio & Quick Ratio.......................................2

Receivable Turnover & Average Days' Sales Uncollected.............2-3

Inventory Turnover & Average Days' Inventory on Hand..............3

PROFITABILITY.......................................................3-7

Profit Margin.....................................................3-4

Asset Turnover....................................................4-5

Return on Assets..................................................5

Debt to Equity....................................................5-6

Return on Equity..................................................6-7

CONCLUSION..........................................................7-8

APPENDIX............................................................9

INTRODUCTION

Ford Motor Company, a large United States automotive corporation, strives for

success each and every year. The success of Ford Motor Company, as well as

other corporations, can be measured by analyzing the two most important goals of

management, maintaining adequate liquidity and achieving satisfactory

profitability. Liquidity can be defined as having enough money on hand to pay

bills when they are due and to take care of unexpected needs for cash, while

profitability refers to the ability of business to earn a satisfactory income.

To enable investors and creditors to analyze these goals, Ford Motor Company

distributes annual financial statements. With these financial statements,

liquidity of Ford Motor Company is measured by analyzing factors such as working

capitol, current ratio, quick ratio, receivable turnover, average days' sales

uncollected, inventory turnover and average days' inventory on hand; whereas

profitability analyzes the profit margin, asset turnover, return on assets, debt

to equity, and return on equity factors.

LIQUIDITY Working Capital

Ford Motor Company's working capital fluctuated significantly in the years

1991-1995. This phenomenon is directly attributable to the fact that Financial

Services current assets and current liabilities are not included in the total

company current asset and current liability accounts. For example, the

fluctuation from 1994 ($1.4 billion) to 1995 (-$1.5 billion) of $2.5 billion

would suggest that Ford would be unable to pay liabilities during the current

period. However, examination of the Financial Services side of the business

reveals that sures of $13.6 billion existed in both 1994 and 1995,

convincingly mitigating the figures indicating negative working capital.

Current Ratio & Quick Ratio

The current ratio in the years 1991-1995 has remained stable, fluctuating

between 0.9 and 1.1. The quick ratio has also remained stable, fluctuating

between 0.5 and 0.6. The larger fluctuation in the current ratio versus the

quick ratio is caused by inventories being included in the asset side of the

equation. Although inventories were significantly higher in both 1994 and 1995,

current liabilities were also higher. In addition, marketable securities

decreased substantially in 1994 and 1995. These factors resulted in the

stability of both the current ratio and quick ratio.

Receivable Turnover & Average Days' Sales Uncollected

An examination of trends in Ford Motor Company's receivable turnover and average

days' sales uncollected ratios reveal positive indicators of Ford's liquidity

position. The receivable turnover, a function of net sales and average accounts

receivable, has nearly doubled in the years 1993-1995 versus 1991-1992. This

trend indicates an extensive increase of net sales in relation to accounts

receivable. Receivables were relatively higher in 1994 than in any other of the

five years, affecting the ratio for both 1994 and 1995. However, net sales

increased 30% in 1994 and 34% in 1995 over the average net sales of 1991-1993.

The average days' sales uncollected ratio has decreased significantly over the

same period, from 16.9 days in 1991 to 9.7 days in 1995. The substantial

decrease in average days' sales uncollected ratio coupled with the near doubling

of the receivable turnover ratio is a reflection of Ford's strong sales and

effective credit policies in years 1993-1995.

Inventory Turnover & Average Days' Inventory on Hand

An examination of trends in the inventory turnover and average days' inventory

on hand ratios also reveal positive indicators of Ford's liquidity position.

Inventory turnover, a function of cost of goods sold and inventories, has

remained stable between 14.0 and 16.0 times from 1992-1995. The average ratio

over these four years (15.1 times) is 40% higher than that of 1991. The average

days' inventory on hand, a derivative of the inventory turnover, has conversely

decreased to stable level fluctuating between 23.5 and 26.0 days in the years

1992-1995. The operating cycle of Ford Motor Company has decreased

significantly as the table below indicates.

1991 1992 1993 1994

1995

Days: 50.8 29.0 33.8 31.1

34.3

PROFITABILITY Profit Margin Profit margin, which is net income divided by net

sales, is a measure of how many dollars of net income is produced by each dollar

of sales. As you can see in Appendix 12, Ford Motor Company had a substantial 4

year rise in profit margin. Using horizontal analysis, the profit margin

increased 98% from 1991 to 1992, 566% from 1992 to 1993 and then 79% from 1993

to 1994. Although the profit margin from 1994 to 1995 decreased 26%, that is

more than acceptable when you look at the substantial increases in the past few

years. In the first year, Ford had a profit margin of -3.1%. That means for

every dollar of sales, Ford lost $3.10. This is obviously not a good position

to be in. During 1991and then carried over into 1992, it cost Ford more money

to make sales than it did when it recorded the income for those sales. They

realized at this time it was important for them to keep things such as selling

and administrative expenses lower, as well as the cost of sales, which included

their production, manufacturing, and warehousing costs. By following a plan

more complex than I can describe here, Ford steadily increased it's sales while

it lowered it's expenses and it's cost of sales. This directly increased Ford's

profit margin at a substantial rate within the next three years.

Asset Turnover

Asset turnover involves Ford's net sales divided by their average total assets.

This ratio demonstrates the efficiency of assets used in producing sales. A

company like Ford Motor Company has an enormous amount of assets. Computers to

heavy equipment to buildings. All of those assets, many more, are all

taken into consideration when figuring asset turnover. For example, Ford would

like to know that if it decides to purchase 20 new computer-aided engineering

stations for a cost of about $2,400,000, they would like to see a higher asset

turnover to give them the proof that the investment is being used at maximum

efficiency. Ford's asset turnover steadily increased in incremental amounts

between the years of 1991-1995 (see appendix 12), but on average it was about .

43 for the entire 5 year period. Using trend analysis to understand this ratio

would give you a pretty good idea that the asset turnover of Ford Motor Company

is stable. Trend analysis would give you an index number for 1992 of 100, while

the index number for 1995 would be 112. These index numbers would result in a

slightly positive but relatively straight line across the page. As a

prospective investor this would probably cause you to investigate more deeply as

to why Ford can't more efficiently use their assets to produce sales. As a

current stockholder, this trend over the past five years may give you some

comfort because of the incremental increases (at least it isn't going down).

Return on Assets

Return on assets is a very good profitability ratio. It is comprehensive when

compared to profit margin and asset turnover. Return on assets overcomes the

deficiency of profit margin by relating the assets necessary to produce income

and it overcomes the deficiency of asset turnover by taking into account the

amount of income produced. Mathematically, return on assets is equal to net

income divided by average total assets, or more simply put, profit margin times

asset turnover. Ford can improve it's overall profitability by increasing it's

profit margin, the asset turnover, or both. Looking at the numbers, it was

actually Ford's increase in profit margin that really gave it the boost it

needed to raise the return on assets from the black to the red. A steady

increase in return on assets from -1.3% in 1991 to an acceptable 2.2% in 1994 is

a good sign to investors. This steady climb of 169% resulted in an overall

increase in the earning power of Ford Motor Company. Ford's increase in

profitability shows satisfactory earning power which results in investors

continuing to provide capital to it.

Debt to Equity

The debt to equity ratio shows the portion of the company financed by creditors

in comparison to that financed by the stockholders. It is total liabilities

divided by stockholder's equity. Ford's debt to equity ratio is relatively high

(see appendix 12). When measuring profitability, a high debt to equity ratio

means the company has high debt and must earn more profit to protect the payment

of interest to it's creditors. This high debt to equity ratio would also

interest stockholders because it shows what part of the business is financed

through borrowing or in other words, is debt financed. Of the five years we

analyzed, the lowest debt to equity ratio was during 1991 (6.65) and the highest

was in 1993 (11.71). In comparison to return on assets, a higher creditor

financed year such as 1991 did not have an positive effect on profitability. It

seemed that through increased borrowing in 1993, a higher debt to equity ratio

was produced, but overall profitability also went up. Debt to equity is only

one part in a full profitability analysis. The only real information that the

debt to equity ratio can produce is it can show how much expansion is possible

through the borrowing of long term funds; basically it show's a company's long-

term solvency. A higher debt to equity ratio essentially means that the company

will be able to borrow less money. The company must rely more on stockholder

investment. Ford was able to lower it's borrowing of funds from 1993 through

1994 and into 1995, while still effectively increasing it's profit margin and

return on assets. This means Ford was able to use stockholder's investments to

increase it's profitability rather than borrow the funds to do it.

Return on Equity

Return on equity is the ratio of net income divided by the average stockholder's

equity. This ratio is of great interest to stockholders because it shows how

much they have earned on their investment in the business. In the years of 1991

and 1992, stockholders lost money on their investment in Ford Motor Company (see

appendix 12). No one likes to lose money, even if it is a couple of cents on

the dollar. A major stockholder could incur quite a loss because of this. In

the next three years, return on equity was on the positive side, the peak being

in 1994 when stockholders earned about 28% on every dollar invested. Quite a

good return considering some investors are happy with a steady 8% return.

Considering the previous years, the return on equity for Ford seems to be

positive. Common knowledge dictates that most companies experience a downturn

every now and then. Ford's investors are able to remain invested in the company

because it's overall 5 year return on equity is high enough to give investors

the high returns they seek. A return on equity consistently above 16% with a

few negative years mixed in is certainly lucrative enough to maintain a strong

profitability measurement and project a positive image to the investors of Ford

Motor Company.

CONCLUSION

Although Ford Motor Company is one of the largest companies in the world, we can

still attribute accounting trends to some of the key events in Ford's history.

In 1990, Ford acquired Jaguar Cars, Ltd. Jaguar was a company suffering

terrible loses due to poor quality, and lack of sales. Jaguar has been in the

black since Ford purchased them until 1994. It is important to note that Ford's

net income trend from 1991 to 1995 illustrates this. In 1992, the Ford Taurus

became the number one selling car in the United States, which helped increase

1992 net earnings, and in 1994 the Ford Falcon was the top selling car in

Australia, helping maintain the trend of increasing net income. It is important

to note that Ford's net income has increased from 1991 to 1994, and then

decreased in 1995. There are several possible causes for this change in the

trend. In 1995, Ford acquired 20% equity in a major Chinese truck manufacturer,

and launched several new vehicles; including the Ford Contour, Ford Mondeo,

Mercury Mystique, Ford F-150, and Ford Taurus. These additional investments and

expenses help explain the decrease in net income in 1995. Overall, the company

has done well, and with reorganization in 1996 to decrease spending and increase

efficiency, Ford is striving for future periods of growth.

OTHER KEY EVENTS:

1992 - Ford Citi-bank Mastercard introduced, customer 5% discount on

purchases

1994 - Ford acquires 100% of Hertz Corporation, the world's largest car

rental

company

APPENDIX

DESCRIPTION PAGE

Consolidated Income Statements...................................Appendix 1-2

Spreadsheets..................................................Appendix 1

Graphical Representation......................................Appendix 2

Consolidated Balance Sheets......................................Appendix 3-5

Spreadsheets.................................................Appendix 3-4

Graphical Representation.....................................Appendix 5

Consolidated Retained Earnings Statement.........................Appendix 6-7

Spreadsheets.................................................Appendix 6

Graphical Representation.....................................Appendix 7

Consolidated Statement of Cash Flows.............................Appendix 8-9

Spreadsheets.................................................Appendix 8

Graphical Representation.....................................Appendix 9

Evaluation of Liquidity..........................................Appendix 10-11

Evaluation of Profitability......................................Appendix 12-13

Liquidity & Profitability Formulas...............................Appendix 14

Source: ChinaStones - https://china-stones.info



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