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Analyzing Ford Motor Company

Balance Sheet

It is not difficult to imagine the volume of financial transactions at large enterprises daily. In order to implement proper economic policy, competent production management, and maintain competitiveness, an analysis of the value of the organization’s assets and liabilities is carried out, called the balance sheet. In other words, the primary mission of a tabular form is to avoid confusion in financial strategy. The balance sheet structure consists of non-current and current assets and a set of liabilities, the results of which are equal. The general accounting formula reflecting this rule is as follows: Assets = Liabilities + Equity (Melander et al., 2017). As a rule, Liabilities include capital and reserves, as well as long-term and short-term financial liabilities. It is because of the identity of the two categories that the balance sheet was named. The use of a balance sheet in an enterprise allows the financial department to conclude the organization’s economic stability, what assets it possesses, and what debt obligations it has. Moreover, a balance sheet is necessary when interested parties planning cooperation could assess the company’s financial situation, how well the business is going, and whether bankruptcy will not occur soon. Finally, the balance sheet is studied by banks to determine the creditworthiness of the borrower.

Annual Report Analysis

Ford Motor issued a public report in 2012, which includes information about the balance sheet for the reporting period. For example, on page 43 of the report, it is stated that the company’s cash by the end of 2012 is $10.9 billion against $ 12.1 billion in 2011. In other words, the downward trend in cash turnover is noteworthy. Moreover, according to the document, the total value of assets in Ford Motor is $192.366 million, while for the end of 2011, the value of assets was estimated at $179.248 million. In contrast, the company’s Liabilities for 2012 were $176,055, while for 2011, they were $164,177. It is known that the central core of the company’s liabilities is equity, so in terms of changes, “at December 31, 2012, Total equity attributable to Ford Motor Company was $15.9 billion, an increase of about $900 million compared with December 31, 2011 ” (Ford Motor Company, 2013, p. 45). In fact, the increased equity capital, probably due to shareholders’ additional capital investments, was the reason for the growth of liabilities for this period.

Financial Indicators

To analyze the company’s stability and determine the competitiveness and profitability of investment, it is necessary to compare financial indicators that show additional information about the balance sheet. Nevertheless, according to Sunjoko & Arilyn (2016), it is necessary to calculate the total capitalization:

Formula

In other words, about 92% of the company’s assets are borrowed, which means that most of the assets are financed from borrowed funds.

Formula

This ratio allows the investor to be sure that Ford Motor meets its debt obligations, which is equivalent to the efficiency of investing in the company. Moreover, in order to assess risks, company leaders often resort to calculating liquidity ratios:

Formula

According to Kenton (2019), this ratio is below the norm, indicating a high risk of cash conversion for debt repayment.

Formula

Formula

Formula

This number shows that Ford Motor has debt that is approximately six times its equity. Once the economic fundamentals have been determined, it is advisable to compare the values with the industry averages. For this purpose, the right solution would be to use a comparison table.

Table 1. Comparison of financial indicators of the industry and calculated 

Ford Motor Automobiles Ind.
DR 0.915 0.76
CR 1.226 1.23
CashR 0.177 0.06
QR 0.842 0.19
D/E 5.86 2.61

References

Debt ratio — Breakdown by industry. (n.d.) Ready Ratios. 2020. Web.

Ford Motor Company. (2013). Profitable growth for All 2012 annual report [PDF document]. Web.

Industry norms and key business ratios. (n.d.) Credit Guru Inc. 2020, Web.

Kenton, W. (2019). Cash Ratio. Investopedia. Web.

Melander, O., Sandström, M., & von Schedvin, E. (2017). The effect of cash flow on investment: an empirical test of the balance sheet theory. Empirical Economics, 53(2), 695-716. Web.

Sunjoko, M. I., & Arilyn, E. J. (2016). Effects of inventory turnover, total asset turnover, fixed asset turnover, current ratio and average collection period on profitability. Jurnal Bisnis dan Akuntansi, 18(1), 79-83. Web.

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