ANALYSIS OF FORD AND GENERAL MOTORS
Introduction
General Motors underwent incorporation as a Delaware corporation in 2009.The company designs builds and sells automobiles and automobile parts world over. Also, the company through GM Financial provides automotive financing services.
Similarly, Ford Motor Company sells automobiles created and built by Henry Ford. The company, incorporated in Delaware in 1919, has its operations in six continents. Other than the production and sales of automobiles, it engages in the provision of financial services through Ford Motor Credit Company.
The process involves comparison of financial ratios of General Motors, Ford Company and the averages within the industry of operation. The ratios can be profitability, solvency, gearing, and liquidity (Morley, 1984)
Profitability analysis
Net profit margin
Net profit margin indicates the net profit a company earns per dollar of total sales. It is a profitability ratio that is key in comparing two companies in the same industry (Grier, 2007). A high net profit margin indicates a high profitability. In comparing two companies, it is true that the one with a higher net profit margin is more profitable. In the period ending 31st December 2014, General Motors Company had a net profit margin of 2.58% which is a fall from a figure of 3.43% in the period ending 2013. The trend indicates a fall in profitability between 2013 and 2014 for General Motors.
Ford’s net profit margin for 2014 was 2.21% meaning that it registered a profit of $0.0221 for every dollar of revenue generated during the year (Grier, 2007). The value represents a decline from 4.89 registered in 2013. The ratio indicates that the profitability of both the companies fell in 2014.In 2013, Ford registered a higher rate of profitability than General Motors. However, the results of 2014 show a different pattern. In comparison to the industry net profit margin of 2.54% posted in the last quarter of 2014, only General Motors is doing better than the industry.
Return on Assets
This ratio measures the ability of the company to use its assets in generating a net profit (Khan & Jain, 2007). It indicates how efficiently the investment in assets recovered in profits. A high Return on Assets means the company is using its assets efficiently. In comparing two firms within the same industry, a higher Return on Assets is an indicator of better performance.
General Motors recorded a Return on assets of 2.26% in 2014 which was a fall from a value of 3.20% in 2013 indicating a fall in profitability of the company. The figures imply that a profit of $0.0226 is realizable for every dollar of assets used. Ford Company, on the other hand, registers a Return on Assets of 1.53% indicating a decline from 3.55% registered in the year 2013. The industry registers a Return on assets of 2.76% in 2014 implying that both General Motors and Ford are performing poorer than industry levels.
Return on equity
As a profitability ratio, return on equity is an expression of net income as a percentage of the stockholder’s equity. It signals how much profit the company generates from a dollar of investment (Khan & Jain, 2007). In 2014, General Motors recorded a Return on Equity of 11.33%. The value implies that the organization realized a net income of $0.1133 on every dollar of equity invested. The figure realized is lower than the 12. 51% realized in the financial year 2013. Similarly, Ford registers a fall in its return on investment from 27.55 in 2013 to 12.85% in 2014. Ford has a higher Return on Equity in both years. For both companies, the value registered as the return on equity in 2014 for the industry is higher at 16.47%.
Ford Company realizes a higher Return on Equity because they sell to their dealerships for retail sale and for sale to fleet customers (Khan & Jain, 2007). These fleet customers include daily rental car companies and governments. Such sales also involve the sale of accessories and parts.
Liquidity ratios
Current ratio
The current ratio indicates the amount of current assets available per dollar of current obligations (Gibson, 2009). A current ratio of more than one implies that a business has sufficient current assets to pay its short-term obligations. As at 31st December 2014, the current ratio for General Motors was 1.27 implying that its current assets were adequate to pay all its current liabilities as soon as they were due. For every dollar of current liabilities, there was $1.27 of current assets. The firm’s current ratio decreased from 1.31 in 2013 signaling that the liquidity of general motors decreased in 2014.
Ford’s current ratio was 6.58 showing that its current assets were 658% of the total current liabilities in 2014. Therefore, Ford’s current assets were sufficient to repay all its current obligations. The ratio was 6.74 in 2013. The above trend indicates that the liquidity of Ford declined. Ford had a better liquidity than General Motors in both years.
In December, the industry had a debt coverage ratio of 1.32. This value is slightly higher than that of General Motors implying that the firm was doing worse than the industry. Ford, on the other hand, had a current ratio that is higher than that of the industry making it financially healthy
Quick ratio
The quick ratio for general motors was 1.07 in 2014 thus its quick assets could meet all of its total current obligations (Vandyck, 2006). The quick ratio was more than the desired/rule of thumb’s value of 1. The ratio was 1.08 in 2013 implying that the liquidity of general motors decreased in 2014.
The quick ratio for Ford was 6.19 in 2014 indicating that its quick assets were 619% of the total value of its current obligations. Therefore, the quick assets were adequate to cover all its short-term obligations (Vandyck, 2006). The ratio decreased from 6.34 in 2013 indicating that Ford’s liquidity worsened in 2014. It had a better liquidity than that of general motors in both years.
The industry had a quick ratio of 0.39 signaling that General Motors n good financial health (Gibson, 2009). Similarly, Ford was in a perfect state to deal with obligations that would require quick assets to be settled.
Solvency ratios
These ratios measure the ability of the company to continue by comparing its debt levels with equity assets and earnings. They give the picture of the company's ability to make payments to creditors, bondholders and banks
Debt equity ratio
The debt-to-equity ratio as a financial ratio gives the proportion of debt financing (liabilities) about the organization’s equity (Gibson, 2009). The high debt-to-equity ratio is not favorable as it implies that the business is borrowing more resulting in increased risks such as high-interest rates. If this ratio is more than one, then the implication is that asset financing comes more from debt and less from equity.
General Motors recorded a debt-to-equity ratio of 3.995 in 2014. This value is a rise from 2.89 in 2013 implying that for every dollar of equity, the organization had $3.995 of liabilities (Peterson & Fabozzi, 2012). This value had risen within the financial year signaling an increased leverage activity by the organization.
Ford had a debt-to-equity ratio of 7.39 in 2014 and 6.73 in 2013. The figures represent an increase in the gearing ratio for the organization (Morley, 1984). The firm now uses a debt financing that is 739% of equity. The reason for such an increase could be partly due to Fords funding strategy that require the organization to maintain a given level of liquidity to support the financing services and growth. Both organizations operated at a ratio that was above the industry rate of 1.31 by December 2014.
Total debt ratio
This ratio gives an indication of the organization’s debts as a percentage of its assets. Being a solvency ratio, it shows the ability of the company to pay off its obligations with its assets. The total debt ratio percentage represent the percentage/ proportion of the total assets that has been financed by debt. The ratio usually ranges between 0.00 and 1. If the value is high, then it implies that the claims of creditors are of a high proportion of the assets.
Ford had a total debt ratio of 0.88 in 2014 implying that 88% of the assets are under the claims of creditors. The value represents an increase from 0.87 in 2013 implying that the organization is becoming more leveraged (Peterson & Fabozzi, 2012).
General Motors recorded a total debt ratio of 0.7973. The figure represents an increase from 0.7405 in 2013. The increase implies an increase in the level of leverage of the company. The figures are however lower than those within the industry which reported a value of 3.83 as at December 2014.
The analysis indicates that Ford was more profitable in 2013 than General Motors, but that changed in 2014. The liquidity of Ford was higher than that of general motors in both years
References
Gibson, C. (2009). Financial reporting & analysis. Mason, OH: South-Western Cengage Learning.
Grier, W. (2007). Credit analysis of financial institutions. [London]: Euromoney.
Khan, M., & Jain, P. (2007). Management accounting. New Delhi: Tata McGraw-Hill.
Morley, M. (1984). Ratio analysis. Berkshire, England: Published for the Institute of Chartered Accountants of Scotland by Gee & Co.
Peterson, P., & Fabozzi, F. (2012). Analysis of Financial Statements. Hoboken: John Wiley & Sons.
Vandyck, C. (2006). Financial ratio analysis. Victoria, B.C.: Trafford.
APPENDIX
GENERAL MOTORS INCOME STATEMENT
BALANCE SHEET FORD
FORD INCOME STATEMENT
