- Term Papers and Free Essays

Financial Ratio Analysis Report Of Ford Motor Company

Essay by   •  March 7, 2011  •  1,668 Words (7 Pages)  •  3,723 Views

Essay Preview: Financial Ratio Analysis Report Of Ford Motor Company

Report this essay
Page 1 of 7

Any successful business owner or investor is constantly evaluating the performance of the companies they are involved with, comparing historical figures with its industry competitors, and even with successful businesses from other industries. To complete a thorough examination of any company's effectiveness, however, more needs to be looked at than the easily attainable numbers like sales, profits, and total assets. Luckily, there are many well-tested ratios out there that make the task a bit less daunting. Financial ratio analysis helps identify and quantify a company's strengths and weaknesses, evaluate its financial position, and shows potential risks. As with any other form of analysis, financial ratios aren't definitive and their results shouldn't be viewed as the only possibilities. However, when used in conjuncture with various other business evaluation processes, financial ratios are invaluable. By examining Ford Motor Company's financial ratios, along with a few other company factors, this report will give a clear picture of how the company is doing now and should do in the future.

This is a trend table of Ford's financial ratio for the previous five years:

Ford Motor Co. (DE)

Ratios 12/31/2004 12/31/2003 12/31/2002 12/31/2001 12/31/2000

Return on Equity (%) 22.65 7.9 5.08 -70.04 29.07

Return on Assets (%) 1.19 0.29 0.1 -1.97 1.9

Return on Investment 8.13 5.62 5.87 2.23 11.24

Gross Margin 0.021 0.021 0.023 0.02 0.026

Operating Margin (%) 6.22 4.94 5.56 2.07 10.42

Net Profit Margin (%) 2.03 0.3 -0.6 -3.36 2.04

Quick Ratio 0.29 0.35 0.35 0.22 0.2

Current Ratio 0.47 0.52 0.51 0.37 0.33

Working Capital/Total Assets -0.22 -0.18 -0.16 -0.23 -0.28

Total Debt to Equity 8.61 13 25.67 18.3 6.05

Long Term Debt to Assets 0.35 0.38 0.41 0.44 0.35

Interest Coverage 1.69 1.18 1.11 0.3 1.76

This is a trend table of industrial average financial ratio for the previous five years in comparison:

Industry Averages

Ratios 12/31/2004 12/31/2003 12/31/2002 12/31/2001 12/31/2000

Return on Equity (%) 17.22 4.20 -90.92 -0.37 16.89

Return on Assets (%) 3.56 0.71 -2.08 4.18 4.62

Return on Investment 9.42 4.31 5.42 2.16 13.39

Gross Margin .018 .018 .019 .019 .020

Operating Margin (%) 5.42 4.09 -3.02 7.05 8.11

Net Profit Margin (%) 2.89 1.43 -0.67 3.79 3.88

Quick Ratio 0.86 0.91 0.71 0.71 0.80

Current Ratio 1.36 1.46 1.13 1.57 1.26

Working Capital/Total Assets 0.10 0.10 0.01 0.04 .06

Total Debt to Equity 7.26 11.67 19.23 14.82 8.05

Long Term Debt to Assets 0.35 0.49 0.95 0.45 0.21

Interest Coverage 8.85 3.00 0.13 -1.63 6.48

The analysis of these ratios shows how Ford stands as a company for the past five years. Return on equity (ROE) reveals how much profit a company earned in comparison to the total amount of shareholder equity on the balance sheet. For long-term investing with great rewards, companies that have high return on equity ratios can provide the biggest payoffs. This ratio also tells investors how effectively their capital is being reinvested, so it is a good gauge of management's money handling skills. Ford is showing a considerable turn around in this area this past year, which could easily be due to changes in management. They are also reasonably following the industry in this area.

Return on assets (ROA) tells how much profit a company generates for each dollar in assets. It measures the asset intensity of a business. The lower the profit per dollar of assets, the more asset-intensive the business is. Ford is asset-intensive, because it requires big, expensive equipment to generate profit. This means more money must be reinvested into the company to continue to generate earnings. Even though their lower number is described in asset-intensity, Ford is consistently falling a few percentage points below the industry average in this area. This could be a consideration against the company.

Return of investments (ROI) ratio measures the combined effects of profit margins and total asset turnover. This ratio compares the way a company generates profits, and the way it uses its assets to generate sales. If assets are used effectively, ROI will be high. According to Ford's numbers, this has been an area of gradual improvement over the past few years, after a drastic drop from 2000 to 2001. This is the norm for the industry, as well. Employee pricing promotions will be a big consideration in this area for this year.

Gross margin tends to remain stable over time. However, this ratio is still crucial to evaluate, because fluctuations can be a sign of fraud or irregular financials. A higher gross margin than other companies in the industry also shows more efficiency. Ford's consistency in this ratio speaks well of the company's stability. The fact that the company is consistently ahead of the industry also speaks highly of Ford's efficiency rate.

Operating margin also measures management's efficiency. It does so by comparing the quality of a company's operations to others in the industry. A higher operating margin tends to mean lower fixed costs and better gross margin. This gives management more flexibility when setting prices, which is particularly important during times of financial hardship. This is another area where Ford is slowing turning things around. It is no surprise, though, that the company is also fairing above industry averages in this area.

Net profit margin is how much profit a company makes for every dollar it generates in revenue. Usually, the higher the company's net profit margin, the better. However, there



Download as:   txt (10.7 Kb)   pdf (125.9 Kb)   docx (13.2 Kb)  
Continue for 6 more pages »
Only available on