Comprehensive Financial Analysis of Ford Motors (MBA Report)

This report presents a detailed financial analysis of Ford Motors, examining its performance through various metrics and models. The analysis includes an assessment of the cash cycle, cash position, and the application of the Higgins Model to evaluate financing decisions. The report delves into Ford's debt policy, scrutinizing its current debt levels and interest coverage ratios. It further investigates changes in the company's margins, management of selling, administrative, and general expenses, and tax planning strategies. Recommendations are provided to improve the net profit margin and return on equity. The report also explores the Weighted Average Cost of Capital (WACC), including definitions, comments, and potential improvements. Finally, it provides insights from a manager's perspective, including a summary of strengths, ratio analysis, valuation, and avenues for growth, concluding with investor's decisions.

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FORD MOTORS

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Table of Contents
Financial analysis.............................................................................................................................4
1.4 Cash cycle..............................................................................................................................4
1.5 Cash Position..........................................................................................................................4
2.2 Higgins Model...........................................................................................................................5
2.3 Advice on debt policy................................................................................................................5
4.2 Are company’s margins changing?...........................................................................................6
4.3 Is the company managing S&G expenses?................................................................................6
4.4 Tax planning strategies..............................................................................................................7
4.5 Improve the net profit margin....................................................................................................7
5.2 Improvement in ROE.................................................................................................................7
7. WACC.........................................................................................................................................8
7.1 Definitions and Comments.....................................................................................................8
7.2 Definitions and Comments.....................................................................................................9
7.3 WACC increasing or decreasing..........................................................................................10
7.4 Two ways to improve WACC..............................................................................................10
8. Others.........................................................................................................................................10
Part 3: Manager’s Perspective.......................................................................................................10
Summary of strength..................................................................................................................10
Ratio analysis and valuation......................................................................................................11
Further ways of growth..............................................................................................................11
Part 4: Investor’s Decisions...........................................................................................................11
Creditor’s decision.....................................................................................................................11
Equity Investor’s decision..........................................................................................................12
References......................................................................................................................................13

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Financial analysis
1.4 Cash cycle
 Cash cycle is a metric that is used that expresses how much time is taken by the company
to convert its inventory and other resources into cash from sales. It is one of the severe
quantitative measures which help in the efficiency of the overall operations of the
company. The major steps that shall be taken by Ford Company must be to analyze the
cash and operations on the regular basis as it would keep a track of the general expenses
that can be cut down (Ford, Housel & Mun, 2017).
 As per Ford companies the suppliers shall optimize the inventory management and it
helps in stocking up and the best way is to reduce the product design complexity.
 The company must also optimize procure to pay cycle option as it helps to monitor
contract compliance to minimize the payments. The company must also rationalize the
supplier base for greater leverage in contract negotiations.
 The cash conversion cycle can also be improved by conceptualizing the process of
changes (Calhoun, 2020).
1.5 Cash Position
Cash position is the position which is the basic pillar for any organization and the cash position
is $346. The company is not holding too much of cash and this again reflects that company is
able to generate enough cash and settle the debts on time.
It can also be observed from the cash cycle of the company as the cash is collected in 117.39
days which has been increased from 107.15 in the year 2017, moreover the cash cycle is highest
in case of Ford company in comparison to Tesla and General Motors. The collection period can

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be reduced by collecting the cash from the debtors and the selling the inventories at a faster pace.
Further, the credit terms shall be reduced by Ford to collect the cash on time to settle the current
obligations, however the company is also working well and as they have the ability to pump out
the ample earnings (Raustad, 2017).
2.2 Higgins Model
According to Higgins model of financing decisions the five elements that have must be analyzed
are flexibility, distress costs, tax benefits, market signaling and management incentives.
While observing the tax factor first, the interest is tax deductible for Ford Motors. The lowering
down of taxes also leaves the greater amount for the investors and shareholders. Distress costs is
associated with increase in the debt component and for company like Ford Motors, debt just
keeps on increasing at a slower pace. Flexibility is the most strong pillar for Ford Motors as it
involves how much balance is their between cash, equity and long term debts. This allows the
company to be financially flexible. Ford Motors is having that financial flexibility as cash is
enough to cover certain expenses. Further issuing more debt will increase the financial leverage
over the company and this can channelize all of the resources towards payment of the fixed
installment which will create burden for Ford Motors and hence low debt shall be used
(Bashkirtseva & Pankratov, 2019).
2.3 Advice on debt policy
At present, Ford Motors have acquired short term debt as well as long term debt. The short term
debt costs $358 whereas the long term costs $101. Overall the current assets are able to pay back
the current liabilities over the period of last five years efficiently; hence one thing can be surely

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stated that company is liquid. However, if the company issues more debt, it will increase the
advantage of tax deduction but at the same time it will also increase the liability on the company
to pay back a fixed installment. Too much debt would define company to be totally dependent;
hence current scenario is optimal from the point of view of Ford Motors. As per the current times
interest coverage ratio of Ford, the ability to pay back the financial costs as been reduced in the
year 2019, over the year 2016 from 7.16 times to 2.39 times. This also implies the company must
invite lower debt in the family (Morimoto, Hori, Maebayashi & Futagami, 2017).
4.2 Are company’s margins changing? 4.3 Is the company managing S&G expenses?
No, from the income statement it can be ascertained that selling, administrative and general
expenses are higher than the gross profit in the past two years and were barely able to leave
anything after these expenses were settled out of gross profits. The operating income turns out to
be negative this year at -$206. The gross profit is barely 13.6% in the year 2019 and the
operating margins just 0.4%. This implies the selling expenses are too much and the activities
that are driving these expenses are marketing expenses and training costs. Indirect costs also
affect the retail price of the vehicle and hence this result in an overall increase in sales
administrative and general expenses as it becomes difficult to keep a balance between three.
These activities are equally necessary to run the daily operations of the business and hence, it
becomes necessary to vouch these costs and keep a track as they have major influence on the
overall profits of the business (Ptok, Jindal & Reinartz, 2018).

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4.4 Tax planning strategies
In order to get an advantage the company has already invested in debt financing, however to
reduce more taxes, the company can also opt for buying new equipment and taking credits and
utilizing them efficiently (Cooper, 2018).
4.5 Improve the net profit margin
Ford developed GP per unit by 3.3% every year – moving from $3,200 to $3,800 per unit. In any
case, there are worries from numerous investigators that Ford makes the greater part of its
benefits on huge SUV's ($12,000 per unit) and the F-Series get ($16,000) per unit) and equals the
initial investment or loses cash on littler models. Another stress is their example of profit – they
make unbalanced benefits in the US contrasted with somewhere else on the planet and hence the
improvement of net profit becomes necessary which can be achieved by cutting down the
expenses in engineering as well as area of marketing. The company must also shut down non
profitable segments and shift their major focus towards SUV’s. The higher cost of steel and
commodity must be catered well to bring back the normal margins (Wong, 2019).
5.2 Improvement in ROE
Return on Equity is defined as the metric that is used to define the profitability of the company
against the profits retained by the business. The higher the return on equity, more is the profit
made by the company, but in the present scenario such as in case of Ford Motors, the picture is
altogether different. The return on equity fell down drastically from 21.8% to 0.3% and this
implies the company is not vouching the ratio and delivering something wrong in terms of
returns (Simanová & Stasiak-Betlejewska, 2019).

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The two ways in which FORD can improve its ratio of return on equity is the use of debt to an
extremely low level to generate the overall returns. The combination of low ROE and high debt
describes the business as an unattractive one. Another best way is to distribute idle cash in hand
and improve asset turnover ratio. By applying these two techniques, the company will be able to
increase the ROE factor and investors will give a thought about investing in Ford Motors.
7. WACC
7.1 Definitions and Comments
Beta is an idea that quantifies the normal move in a stock comparative with developments in the
general market. A beta more prominent than 1.0 proposes that the stock is more unstable than the
more extensive market and a beta under 1.0 demonstrates a stock with lower unpredictability. As
per the current scenario, the beta value of Ford Motors is 1.09 and whereas that of General
Motors and tesla are 1.35 and 0.66 respectively. It can be said that Tesla is having lower risk,
whereas General motors is having high risk and Ford Motors is moderate and tends to unstable as
well (Johansson & Johansson, 2017).
In financial terms, the cost of equity is the value which is the return a firm hypothetically pays to
its value financial specialists, such as investors, to make up for the risk they embrace by
contributing their capital. The cost of equity is 7.33% for Ford Motors, 5.08% for Tesla and
8.69% for General Motors and the highest return is paid by General Motors followed by Ford
(Dhaliwal, Judd, Serfling & Shaikh, 2016).
Credit rating is an estimation of an individual or business element's capacity to reimburse a
financial obligation on the basis of income and past reimbursement accounts. Generally
communicated as a financial credit score, banks and loan specialists utilize a credit rating as an

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assessment as one of the components to decide if company shall be given loan or not (Sangiorgi
& Spatt, 2017).
Cost of debt is the powerful financing cost an organization pays on its obligation commitments,
including bonds, contracts, and some other types of obligation the organization may have. Since
tax is deductible, it's commonly progressively valuable to decide an organization's after-tax cost
of obligation. Cost of obligation, alongside cost of value, makes up an organization's expense of
capital. In the present scenario, the cost of debt of Ford Motors is 2.87%, whereas that of its
competitors is 7.12% for Tesla and 3.22% for General Motors. This also indicates that risk level
of Tesla is comparatively higher than Ford and GM.
7.2 Definitions and Comments
Market value of equity is the absolute dollar estimation of an organization's value and is
otherwise called advertise capitalization. Market value of equity is $3732 for Ford, $7574 being
of Tesla and $5124 for GM (Kerry, 2019).
Market value of debt is defines as the price which the market value speculators would spend to
purchase the debt financing, which contrasts from the book value on the financial report. Ford
consists of $1567 as market value of debt, along with $1437 and $1043 for GM ((Kerry, 2019).
Market value of equity as a percentage of (MV Equity + MV Debt) is the sum of both the cost of
equity as well as cost of debt’s market value which is used as a denominator factor. Ford
Company comprises of $19404 as a total value, $90118 for Tesla, $155557 for GM.
The weighted average cost of capital (WACC) is the rate that an organization is relied upon to
pay on normal to all its security holders to back its benefits. The WACC is normally understood

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as the company's cost of capital. WACC for Ford is 6.35%, 5.22% for Tesla and 5.25% for
General Motors (Frank & Shen, 2016).
7.3 WACC increasing or decreasing
The WACC of Ford motors is increasing and the higher the cost of capital higher will be the risk
involved in the business (Frank & Shen, 2016).
7.4 Two ways to improve WACC
One alternative of capital rebuilding includes substitution of utilizing the equity with debt, since
it means lower costs after tax assessment. On the other hand, Ford can substitute basic stock with
preferred stock to diminish the WACC. Since preferred stock is less expensive than regular
stock, it also helps in pulling the lower value premium rates as it is paid on the priority basis in
case of dividends or even at the time of liquidation (Frank & Shen, 2016).
8. Others
As such no other factors are required to be considered as the financial health of the company is
covered on maximum grounds, whether it is related to techniques like ratio analysis or valuation
of the cost of capital. However the optimal capital structure and dividend policy could also have
been looked into.
Part 3: Manager’s Perspective
Summary of strength
In terms of the operation level, Ford Motors must either distribute idle cash, or generate the cash
faster form debtors and inventory selling. In terms of investing purpose, Ford is an easy catch,
but a risky one ass the returns are not high. In terms of financing, Ford must make use of equity

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as an option to acquire funds to lower down the burden of fixed leverage (Narayanaswamy,
2017).
Ratio analysis and valuation
From the ratio analysis it can be understood that gross margins can change the entire scenario of
the company and it can drive the net profit margins. The sound working capital can also help
company attain a special advantage in comparison to the companies working under the same
industry. The major area that needs to be improved is from the perspective of the investors and
the shareholders as they are not getting efficient returns for the money invested by them.
Further ways of growth
If the company wants to grow in future and improve its financial factors, the non-financial
factors can also help in alignment of proper growth and potential. Due to the pressure from the
technological advancement and environmental awareness, company can build a program that
could drive the customers and can reach them on one go? This would develop loyalty point and it
will also help in increasing the market share of the business (Gaukhar, Adilya & Urazgul, 2017).
Part 4: Investor’s Decisions
Creditor’s decision
From the point of view of debt financing, in the capacity of bank, the two valuable ratios are
leverage ratio and times interest coverage ratio. No, the loan cannot be issued to Ford Motors, as
the company has a very low payment capacity of the financial costs and at the same time, the
assets are mostly financed through debt but not used efficiently. In order to get a loan, the
company must increase the sales and obtain the loans at lower interest levels. Apart from this

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funds shall also be acquired in other form such as equity, venture capital etc (Chang, Chen, Fu &
Yang, 2018).
Equity Investor’s decision
From the point of view of an investor, the two ratios that are significantly important are, net
profit margin and return on equity ratio. As per the calculations it can be stated Ford Motors is
not a great choice to invest in as the net profit margins devastate and returning 0.1% and the
return on equity is just 0.3%. In fact if anyone is holding the shares, must sell them on an
immediate basis. Further, in order to improve the ratio, the company must focus on selling
SUV’s which could improve the gross margins ultimately leading to the improvement in the net
profit margins and must obtain loan at lower interest rates. The cash from inventory shall be
collected faster and the same shall be distributed to increase the overall potential of Ford Motors
(Christensen, et al 2018).

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References
Bashkirtseva, I., & Pankratov, A. (2019). Stochastic Higgins model with diffusion: pattern
formation, multistability and noise-induced preference. The European Physical Journal
B, 92(10), 238.
Calhoun, G. (2020). The Ford Dollar: The Mysterious Multiple. In Price and Value (pp. 1-17).
Apress, Berkeley, CA.
Chang, X. S., Chen, Y., Fu, K., & Yang, E. (2018). Institutional investor horizons, information
environment, and firm financing decisions. Information Environment, and Firm
Financing Decisions (December 12, 2018).
Christensen, B. E., Eilifsen, A., Glover, S. M., & Messier Jr, W. F. (2018). The Effect of
Materiality Disclosures on Investors’ Decision Making. Available at SSRN 3096564.
Cooper, M. (2018). What drives the tax avoidance strategies adopted by US MNEs?
Understanding the heterogeneity of approaches to corporate tax planning in US
multinational enterprises (Doctoral dissertation, University of Reading).
Dhaliwal, D., Judd, J. S., Serfling, M., & Shaikh, S. (2016). Customer concentration risk and the
cost of equity capital. Journal of Accounting and Economics, 61(1), 23-48.
Ford, D. N., Housel, T. J., & Mun, J. C. (2017). Panel 14. Reducing Life Cycle Costs Through
COTS and Additive Manufacturing. In Fourteenth Annual Acquisition Research
Symposium.