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Ford Motor Company Basic Financial Ratios Case Solution
Uria Investment has invested a significant portion of its portfolio in Ford Motor Company Ltd in an attempt to earn long-term, reasonable and consistent returns for its investors. Recently, the stock price of Ford Company declines from USD 13.10 per share to USD 12.18 per share on January 17, 2018. The same was on account of investigation carried out by US regulator against Ford Motors Company to review the faulty airbags in its vehicles which were not able to deploy at the time of collusion. These faulty airbags have caused several deaths and caught the attention of the regulator since Ford Motor Company was failed to take corrective measures on its own to reduce the potential damages in the first place. In this regard, Ford Motor Company had decided to recall all 1 million vehicles globally in an attempt to fix the said problem.
Following questions are answered in this case study solution:
Internal and External view
Decision to Buy / Sell / Hold
Performance since 2018
Case Study Questions Answers
This was a cause of concern for investors including Uria Investment since the outlook of the company remains uncertain on account of the company’s ability to overcome this problem. John Smith, portfolio manager at Uria investment considering his option to safeguard the interest of the investors since he projected the stock price of Ford Motor Company would take a hit if the company could not receive from this problem in the long run and shareholders will be negatively affected if the product safety remains a consistent problem going ahead. Therefore, in order to shuffle the portfolio, Smith is looking for other options for investment in the automotive industry including Honda Motor Company Ltd, Toyota Motor Company Ltd, and General Motors.
2. Internal and External view
Ford Motor Company is the second-largest automobile manufacturer in the United States with a total headcount of 202,000 workers globally working for the company. Since its incorporation in 1956, the major controlling interest remains with the Ford family which owns a 40% equity stake in the company. There were two brands under which the company sold cars. Firstly, the ford brand which offered affordable vehicles, and secondly the Lincoln brand which manufactured and sold luxury vehicles. Ford Motor Company is the pioneer in using industrial workforce in large-scale manufacturing. Through the modern social and economic system, the company had incorporated moving assembly lines into its operations to achieve mass manufacturing. This production technique gained extreme popularity among industrial manufacturing and was studied for decade which later knows as Fordism. The company also employed various optimization techniques and business process modeling to cut its operation cost. In this regard, it used just in time inventory management thereby reducing its inventory cost substantially.
The outlook for global automotive industry remained positive and worldwide sales increased by 5.6% in 2016 and the same is expected to be 3% for the following 2 years (2017 & 2018). The contribution from Asia pacific region was highest in global automotive growth with China recording double-digit growth. In North America, the sales growth was 0.4% on account of increasing demand for trucks and SUVs. The overall global economic outlook is expected to remain positive with an anticipated growth of 2.9% thereby increasing consumer confidence.
Electric vehicles are also getting popular and in the following years are expected to see remarkable growth in this category especially from Europe and China. Tesla remained the market leader however various other companies are capturing this segment through collaboration with nontraditional technology companies to provide innovative solutions for electrification. Ford Motor Company also considers this a vital segment for growth and had committed to spending USD 11 Billion by 2022 on electrical cars technology. There is a rise in environmental concerns in the automotive industry globally whereby diesel engine sales are declining even in some countries including China & India are planning to ban diesel engines.
3. Financial Analysis
The financial analysis is based on the audited finances of the company for FY16 and FY17. Starting with the balance sheet of the company, the total asset footing of the company increased in FY17 from USD 237 Billion in FY16 to USD 257 Billion the second-largest assets in the industry after Toyota Motor Company Ltd. The increase in the asset was essentially due to the sharp increase in accounts receivables which grew from USD 11 Billion in FY16 to USD 62 Billion in FY17. It may be attributable to the provision of flexible credit terms to the customers. Additionally, the company added a new fixed asset amounting USD 7 Billion whereas no other company in the industry made a sizeable investment in fixed assets, Toyota and General Motors reported lower fixed assets in FY17. The investment in fixed assets explains the development of necessary infrastructure to produce electric vehicles indicating the company’s pledge towards this important segment.
Total liabilities increased from USD 208 Billion in FY16 to USD 222 Billion in FY17 mainly on account of higher long-term debt which was obtained to finance the acquisition of fixed asset. The long-term debt of the company increased from USD 93 Billion in FY16 to USD 102 Billion in FY17 approximately equivalent to the addition of new property, plant, and equipment. Growth in retained earnings come on the back of positive net income in FY17, the company reported net profit of USD 7.6 Billion in FY17 as compared to USD 4.6 Billion in the preceding period.
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