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Financial Analysis Consulting Report for Ford Motor Company
Prepared for: Professor Fred Wolf, Busa 302, Pacific Lutheran University

By:
Alf Joachim Vennatro Daniel Lessard Richard Cline Tuan Phan

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Pacific Lutheran University MCL !oo" #2$ aco"a, W% &'$$(

Professor Fred Wolf %ssistant Professor of Business ) *+ecutive in !esidence ,chool of Business PLU #2##2th Par- %ve. , aco"a, W% &'$$( May 2/, 200( 0ear Professor Wolf, Please accept the acco"panyin1 Financial %nalysis !eport of Ford Motor Co"pany. his report is the result of research done on the financial state"ents and analysis perfor"ed on the fi1ures to present the -no2led1e the Ford Motor Co"pany 3roup o4tained durin1 our 2orand pro1ressions throu1h this course. hrou1h this course 2e 2ere 1iven the opportunity to create and analy5e financial state"ents and ratios in ter"s of 2hat they "ean for investors and co"panies in order to e+pand our -no2led1e on ho2 to "ana1e co"panies successfully. he Ford Motor Co"pany 1roup 2ould li-e to than- you for you 1uidance throu1h this course and for the s-ills you 1ave us to critically e+a"ine our o2n invest"ents. We hope this report 2ill sho2 ho2 2e have 1ro2n durin1 the course in 4oth our a4ility to "anipulate the state"ents and also interpret for ourselves 2hat they "ean. ,incerely, he Ford Motor Co"pany 3roup6 0an Lessard, !ichard Cline, %lf 7ennatro and uan Phan

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TABLE OF CONTENTS E ecuti!e Summary """"""""""""""""""""""# %ntroduction & Bac'ground """""""""""""""""""# Financial Statement Analysis Balance S)eet Analysis """"""""""""""""""# Statement of %ncome """""""""""""""""""# Statement of Cas) Flo-s """""""""""""""""## Ratio Analysis """"""""""""""""""""""""" Li.uidity """"""""""""""""""""""""# /rofita0ility """"""""""""""""""""""" Acti!ity """"""""""""""""""""""""### /roforma Analysis """"""""""""""""""""""" Recommendations """"""""""""""""""""""" Appendices References $ ( * +, +$ +( +( +* +1 +2 ,3

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E ecuti!e Summary

E ecuti!e summary
Ford Motor Co"pany has over the last / years had a ne1ative develop"ent in their financial state"ents, 2ith red nu"4ers in their net inco"e, a ne1ative 2or-in1 capital and coverin1 de4t 2ith de4t financin1. With several years of 4ad perfor"ance the Ford Motor Co"pany has had a lot of sales, in 2003 to 200/ they had a positive net inco"e, 4ut in 2002 and 2008 they had a ne1ative net inco"e. *ven 2ith the 4ad results the union a1ree"ents are still in place to -eep the 2a1es of the e"ployees hi1h and -eep the costs of Ford up. Because of the hi1h costs of "a-in1 the cars that Ford produce 9not :ust the cost of e"ployees; their cars are sold 2ith little or no profits. Ford<s de4t has 4een steadily increasin1 over the years, 2hen Ford is usin1 de4t financin1 to pay of de4t 2hen they do not have any cash to pay do2n e+istin1 loans, their lia4ilities are increasin1. Ford<s de4t is ten ti"es their shareholders e=uity. Because of these poor results Ford<s financial ratios are s"all or ne1ative. Ford is not doin1 2ell in the "ar-et. hey are loosin1 "ar-et shares and "oney on their day to day operations. Ford has reached the point in their 1ro2in1 period that they are in their decline. ,o ta-in1 on de4t to continue 1ro2in1 is at this point useless. Ford "ana1e"ent should consider to sell of so"e of the less profita4le co"panies that they o2n to cut do2n the losses in the co"pany, also to cut do2n on their 2or-force to cut do2n costs in their "ain factories. %nother possi4ility is to cut do2n on the nu"4er of "odels they are producin1 for their Ford 4rand. Concentratin1 on a fe2 "odels that people li-e, cuttin1 do2n on the costs of that "odel 2hile at the sa"e ti"e increasin1 the =uality of that product 2ould attract "ore custo"ers to the Ford 4rand and increase their revenue. he Ford stoc- price has over the last year 4een cut in half in value 4y the "ar-et, the "ar-et does si"ply not have any faith in that the "ana1e"ent can turn Ford around on the ti"e ta4le they have set for the chan1es.

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4elcome To Ford he Ford Motor Co"pany 1enerates its "oney throu1h t2o different sectors: %uto"otive and Financial ,ervices. %uto"otive sector<s revenue, inco"e and cash are 1enerated pri"arily fro" sales of vehicles to its dealers and distri4utors. 7ehicles the co"pany produces 1enerally are su4:ect to fir" orders fro" its custo"ers and are dee"ed sold i""ediately after they produced and shipped to its custo"ers. Most of the vehicles sold to its dealers and distri4utors are financed at 2holesale 4y Ford Credit. Ford Credit pays cash to the relevant le1al entity in its auto"otive sector in pay"ent of the dealer<s o4li1ation for the purchase price of the vehicle. he dealer then pays off the 2holesale finance receiva4le 2hen it sells the vehicle to a retail custo"er. he Financial ,ervices sector<s revenue is 1enerated pri"arily fro" interest on finance its "oney to these dealers. he Ford Motor Co"pany 2as -no2n to its ori1inal 4usiness "odel of >afforda4le care for everyone?. Fro" the 4e1innin1 of the Model , 2hich 2as only availa4le in 4laccolor, the co"pany had "ade its state"ent clear in producin1 car for everyone. @o2ever, in the early 20th century, the auto"otive industry has 4een very co"petitive dues to the raisin1 in 4oth do"estic and forei1n auto "a-ers :oin the United ,tates "ar-et. %s the result, Ford needed to chan1e its 4usiness "odel, 4ut faced "any challen1es as co"petitors ca"e throu1h 2ith distinctive desi1ns and =uality. An this report, 2e only loo- at the financial side of the co"pany. We analy5e the stren1ths and 2ea-nesses 4ased on the "ost current financial state"ent of Ford. ,o 2e can co"e up 2ith different reco""endations and su11estions to Ford a 4etter co"pany financially. A Little Bac'ground To Our Company Ford Motor Co"pany entered the 4usiness 2orld on Bune #8, #&03, 2hen @enry Ford and ## 4usiness associates si1ned the co"panyCs articles of incorporation. With D2',000 in cash, the pioneerin1 industrialists 1ave 4irth to 2hat 2as to 4eco"e one of the 2orldCs lar1est corporations. he co"pany 2ent pu4lic and, on Fe4. 2$, #&/8, had a4out 3/0,000 ne2 stoc-holders. Ford Motor Co"pany, a 1lo4al auto"otive industry leader 4ased in 0ear4orn, Michi1an "anufactures and distri4utes auto"o4iles in 200 "ar-ets across si+ continents. With a4out 300,000 e"ployees and #0' plants 2orld2ide, the co"pany<s core and affiliated auto"otive 4rands include Ford, Ba1uar, Land !over, Lincoln, Ma5da, Mercury and 7olvo. Ats auto"otiveErelated services include Ford Motor Credit Co"pany.

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Balance S)eet Analysis: he 4alance sheet for any co"pany represents a snapshot in ti"e of the current situation of their %ssets, Lia4ilities and *=uity. he consolidated 4alance sheets for Ford Motor Co. for the last five years is sho2n in the appendi+ for reference. hey sho2 Current %ssets, Anventories, %ccounts !eceiva4le, otal %ssets, Current Lia4ilities, otal Lia4ilities, ,hareholders *=uity and otal Lon1 er" 0e4t F nu"4ers that are vital to the ratio analysis provided to you, the investor, in this report. Fro" the Balance ,heet you find an analy5e "any i"portant values and ratios that sho2 the a4ility of the co"pany to service its o4li1ations. %"on1 those values that can 4e deter"ined are the 4oo- value of the co"pany, the 2or-in1 capital, ho2 "uch total de4t there is and alon1 2ith that the levera1e ta-en on 4y the co"pany. Gou can see 2hether the co"pany is 1ro2in1, and 4y ho2 "uch, or if they are not, and 4y ho2 "uch they are losin1. Gou can also analy5e 2hether their de4t is increasin1 or decreasin1 and "a-e assu"ptions as to the reasons for it. he "odified 4alance sheet sho2n a4ove sho2s the inte1ral nu"4ers used in the ratio analysis found later in this report and in the appendices. An order to present a 1ood analysis of the last five years in this report the 4alance sheet and the state"ent of cash flo2s sheets had to 4e cut do2n to si5e to conserve space. 0irectly 4elo2 are =uic- e+planations of the ter"s used in the "odified 4alance sheet. Assets & Current Assets: %ssets are ite"s that 2e have in our o2nership that are or can 4e converted to cash. he asset fi1ures depicted in the 4alance sheet for Ford Motor Co. are those fro" the Consolidated Balance ,heets of the rather than the ,ector Balance ,heet for clarification. Current %ssets are those particular assets that are e+pected to 4e converted to cash 2ithin one year6 Cash and Cash *=uivalents, Mar-eta4le ,ecurities, !eceiva4les and Anventories. he %cid est !atio, discussed 4elo2, is the current assets less inventories divided 4y current lia4ilities. his sho2s that 2hile inventories is typically considered a current asset, it is fre=uently illi=uid and, therefore, cannot 4e considered an asset that can =uic-ly help in a distress situation.

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Lia0ilities & Current Lia0ilities Lia4ilities are those "oneys or de4s o2ed to certain creditors. Lia4ilities are essential in calculatin1 the current ratios, =uic- ratios, deter"inin1 the o4li1ations of the co"pany and deter"inin1 ho2 "uch availa4le assets the co"pany has to use. %s 2ith assets, Current Lia4ilities are those lia4ilities that are o2ed 2ithin one year. hese lia4ilities include %ccounts Paya4les and %ccrued Lia4ilities. S)are)olders E.uity he ,hareholders *=uity is the difference 4et2een the co"panies otal %ssets and otal Lia4ilities. ,hareholders *=uity is the total nu"4er at 2hich the co"pany is financed throu1h co""on and preferred stoc-, and also represents the 4oo- value of e=uity of the co"pany. he 4oo- value of the e=uity is not the current value of e=uity, ho2ever, it is the historic value 4ecause it co"es fro" the Balance ,heet, the snap shot in ti"e of the co"panies perfor"ance, not the stoc- "ar-et, 2hich 1ives "ore upEtoEdate valuation. Boo' 5alue of t)e Company he 4oo- value of Ford Motor Co"pany fro" 2002 F 200$ is a respecta4ly increasin1 nu"4er. he 4oo- value increased 4y an avera1e of five 4illion dollars per year durin1 those three years and another one 4illion dollars, a s"aller increase yet an increase nonetheless, for the years 200$ F 200/. he year 2008 , ho2ever, 2as reported in the ne1ative nu"4ers at D 93,$8/; "illion dollars. he ne1ative 4oo- value of e=uity sho2n in the Ford Motor Co.<s 4alance sheet is pri"arily 4ased upon the retained earnin1s reported durin1 the 2008 year. !etained *arnin1s are the e+cess profit retained fro" the co"pany<s operations. Many fir"s, as 2ell as For Motor Co., distri4ute their retained earnin1s in the for" of dividends to their investors. Fro" 2002 F 200/ the retained earnin1s of Ford Motor Co. 2ere as fallo2s 9respectively;: 9nu"4ers are in "illions; D /,/&0 E D ##,8/# E D #8,0$/ E D #2,&/( %s you can see, the 2008 retained earnin1s is no less than D #/ "illion fro" the 200/ retained earnin1s, and even "ore fro" the 200$ retained earnin1s. he drop in retained earnin1s can "ean "any thin1s for a co"pany, 4ut it is possi4ly one of the "ost i"portant fi1ures an investor should loo- at 2hen decidin1 2hether or not to invest in the co"pany, 4ecause one "i1ht see the co"pany<s pri"ary duties as "a-in1 a profit for their custo"ers, and a ne1ative retained earnin1s is e+actly the opposite of that 9instead of 4ein1 called a retained earnin1s, they are -no2n as an accu"ulated deficit;. %ccordin1ly durin1 2008 Ford dropped their cash dividends fro" D .$0 to D .2/ to acco""odate the accu"ulated deficit. 6o- muc) -or'ing capital is t)ere7 Wor-in1 capital is a "easure"ent of a co"pany<s efficiency and health in the short ter". At is utili5ed the Current %ssets less the Current Lia4ilities, and a positive ans2er is an indication of a co"pany<s a4ility to pay off it<s short ter" lia4ilities. Af the ans2er is ne1ative, ho2ever, is an indication of the co"pany<s ina4ility to service its short ter" lia4ilities. '

Ford Motor Co. sho2s a ne1ative 2or-in1 capital for the last five years 2ith no indication of enterin1 the positive as can 4e seen 4y vie2in1 the 2or-in1 capital ratio chart in the %ppendi+ of this report. %s 2ill 4e discussed 4elo2, a ne1ative 2or-in1 capital trend can 4e an indication of declinin1 sales, 2hich can also 4e a possi4ility for the ne1ative retained earnin1s discussed a4ove. he decline in sales can typically "ean there is also a decline in %ccounts !eceiva4le 2hile the %ccounts Paya4le either re"ain relatively constant or increase, creatin1 the distance 4et2een the current assets and the current lia4ilities, and, thus, creatin1 a s"aller 2or-in1 capital ratio. % trend in the Ford Motor Co"pany is the decline in the nu"erical values durin1 the 200/ and 2008 years. he 2or-in1 capital ratio declined fro" D 9#0,/00; in 200$ to D 9$8,/00; in 200/. his drop in 2or-in1 capital is su11estive of a decrease in sales, 2hich 2ould also possi4ly help e+plain the loss of retained earnin1s that occurred 4et2een 200/ and 2008. 6o- muc) de0t is t)ere7 0e4t on the 4alance sheet is "easured in the Lia4ilities section. %s sho2n in the 4alance sheets for the last five years for Ford Motor Co. the de4t has re"ained relatively constant, 2ith an avera1e de4t of D 2(8,/00. here are t2o >outliers? in the data in years 2003 and 200/, ho2ever, they do not constitute a dra"atically sufficient chan1e in the value of the de4t for further analysis. o see the de4t as co"pared to assets and other fi1ures, see the ratio analysis later in the report. 4)at is Ford Motor Co#8s Le!erage7 Financial levera1e is 4asically the use of de4t to increase the e+pected return and the ris- to the e=uity of a co"pany. he "ore ris- a co"pany ta-es on "eans the 1reater potential return on their invest"ents. @o2ever, conversely, the 1reater ris- also "eans the chances for 4i11er losses are also prevalent. !is- analysis is very i"portant 2hen decidin1 2hether or not to invest in a co"pany 4ecause you need to -no2 ho2 ris-y they are to 1o alon1 2ith ho2 2ell they can service their de4t. he ris-ier the co"pany, especially if they are havin1 trou4le financially, the less appealin1 they are to investors. he "a:or levera1e fi1ures that are loo-ed at on the 4alance sheet are the Lon1 er" 0e4t co"pared to the ,hareholders e=uity and the 0e4t co"pared to assets 9to a s"aller de1ree;, also -no2n as the li=uidity. he 0e4t to *=uity !atio is discussed "ore at len1th later in this report in the ratio analysis section. @ere 2e 2ill 4riefly discuss the desired nu"4ers and the trend at 2hich the financial levera1e For Motor Co. has operated durin1 the last five years. he de4t to e=uity ratio "easures ho2 "uch of the co"pany<s e=uity is financed throu1h creditors. he hi1her the ris-, the "ore levera1e they have. he de4t co"pared to e=uity is displayed as a percenta1e of every dollar invested in the 4usiness, sho2in1 the investor that an ideal de4t should 4e lo2er than the e=uity. his is also co""on sense 4ecause one should reali5e that to 4e profita4le you need to have less de4t than you do e=uity.

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%s you can see fro" the "odified 4alance sheet provided for you at the top of this report Ford Motor Co.<s de4t is over #0 ti"es the a"ount of their shareholder<s e=uity throu1hout each of the five years depicted. his is not a favora4le ratio at all 4ecause the s"aller a"ount of de4t you have co"pared to your shareholder<s e=uity the less ris-y you are. Ford Motor Co. is 2ay too ris-y an invest"ent to ne2 investors and current o2ners ali-e. he levera1e has 1one 4eyond 2or-a4le and "ana1ea4le levera1e, and has 4eco"e 4urdenso"e.

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%s Ford Motor Co# 9ro-ing7 By 6o- Muc)7 here are four sta1es in the life of a co"pany6 the start F up sta1e, rapid 1ro2th sta1e, "aturity sta1e and decline sta1e. he start F up sta1e is characteri5ed possi4ly 4y the loss of "oney durin1 the research and develop"ent sta1e, 2here the co"pany "ust develop its products and it esta4lishes its "ar-et shares. he rapid 1ro2th phase of a co"pany is characteri5ed 4y the co"pany 1ro2in1 incredi4ly fast 9as the na"e su11ests; 4ut they tend to 1ro2 too fast for their o2n 1ood and "ust 4orro2 "ore "oney than, perhaps a "ore "ature co"pany 2ould have to, in order to sustain the 1ro2th of the 4usiness. he "aturity phase is characteri5ed 4y the co"pany possi4ly 1eneratin1 "ore cash than it can effectively reinvest. his also "ay 4e partly caused 4y a sli1ht decline in the 1ro2th of the co"pany. %nd finally, the last sta1e, decline, is characteri5ed 4y a decline in 1ro2th and sales, 4ut still a si5ea4le 1eneration of cash. Ford is not a co"pany that "eets any sin1le one of those standards to classify 2hether or not they are in a particular sta1e. Ford Motor Co. is not a co"pany in the 1ro2in1 sta1e of a 4usiness, ho2ever, they are not 1eneratin1 enou1h profits to -eep the co"pany a4ove 2ater so they re=uire lar1e a"ounts of plu1 2hich can, at a =uic- 1lance at the ratios, 1ive the illusion that they "ay 4e a rapid 1ro2in1 co"pany. Ford Motor Co. is not necessarily a co"pany that is in the decline sta1e 4ecause, a1ain, they are not 1eneratin1 enou1h profits to sustain the"selves, ho2ever, 1iven the 2008 sales data, the sales see" to 4e in a do2n2ard phase. An conclusion, Ford Motor Co. is in a rapid F decline F spiral phase 2here their product is not a co""odity consu"ers 2ant, their sales are not sufficient as their de4t continues to increase, and their retained earnin1s too- a shot in 2008. Cuttin1 the a"ounts of their dividends 9discussed a4ove; could 4e and "ost li-ely is an indication of tou1her ti"es ahead, and it can 4e foreseen that "ore dividend cuts could 4e e"inent. he cuttin1 of dividends often sho2s 2orse thin1s 1oin1 on 4ehind the curtains. Because of the pro4le"s Ford Motor Co. has 4een havin1 another e"inent si1n of a declinin1 sta1e co"pany 2as sho2n early in the 200( year that is not portrayed on the data in this report. Ford Motor Co. sold the %ston Martin line of vehicles to a 1roup of private investors for D'$' "illion. his is a si1n that Ford is tryin1 to cut its costs and 1et out of the red. his sale, ho2ever, is a 1ood si1n 4ecause it sho2s the investor that they are not tryin1 to 4uy their 2ay out 4y tryin1 to sell "ore. hey are tryin1 to "ana1e their costs to increase their profits or, in Ford<s case, reduce their losses. here are current ru"ors that Ford is continuin1 to loo- into droppin1 "ore lines of cars such as 7olvo. %s t)eir de0t increasing or decreasing7 %lthou1h Ford Motor Co.<s overall total de4t over the past five years has re"ained relatively constant, stayin1 at a level around D2(8,/00, a 4roader vie2 sho2s that the de4t has a sli1htly increasin1 slope. he individual parts of the lia4ilities section of the Balance ,heet sho2 level increases in %ccounts Paya4le, %ccrued Lia4ilities and 0e4t. % possi4le reason for the increasin1 de4t sho2n in the 4alance sheets is the fact that Ford can no lon1er service its de4t throu1h retained earnin1s and profits, so they are financin1 their de4t 4y 4orro2in1 "ore, and, su4se=uently, increasin1 their de4t.

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4)at is Ford Motor Co# -ort)7 o find the 2orth of a co"pany you "ust find the a"ount of Co""on ,toc- issued and the current price of the Co""on ,toc-. his can 4e found 4y loo-in1 at the current rate at 2hich the co"pany is tradin1 at 4y loo-in1 at the current value on any stoc- tic-er. By "ultiplyin1 these to values to1ether you can 1et the Mar-et 7alue of the co"pany. Ford currently has issued #,'3(,000,000 shares of Co""on ,toc- and at close on Wednesday, May #8, 200( the stoc- 2as tradin1 at D '.(8. his puts the Mar-et 7alue of Ford Motor Co. 9and therefore the value; at D #8,0&2,#20,000. Hver the last five years 94e1innin1 in 200/ and 1oin1 4ac-2ards; Ford Motor Co.<s Mar-et 7alue has 4een D #$,#'#,8$0,000, D 28,'&3,8'0,000, D 2&,(22,880,000, and D #(,/'',$80,000 respectively. %s 2e can see 2ith these nu"4ers the 2orth of Ford is al"ost as sporadic as the other fi1ures 2e have seen 2ith a 1eneral spi-e in the "iddle years.

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Statement of %ncome % co"pany<s state"ent of inco"e is a report of their revenues, e+penses and, usin1 the e=uation revenues less e+penses, their inco"e for a specific period. Li-e a 4alance sheet, the Anco"e ,tate"ent is a snap shot in ti"e of a particular aspect of the 4usinesses operations. % state"ent of inco"e is "ade up of sales and other revenues. hen a list of a co"panies operatin1 e+penses, includin1 Cost of 3oods ,old, Anterest *+pense, a+es and Anterest e+pense. he e+penses are then su4tracted fro" the sales and revenues to calculate the Iet Anco"e 9or Loss; the co"pany has accrued over the specific period. %nother section of the state"ent of inco"e deals 2ith the nu"4er of shares of stoc-, the stoc- price and the price of the dividends dispersed. For Ford Motor Co. the price of the dividends issued for years 2002 F 200/ 2as D .$0 and after a tou1h financial year the price dropped al"ost 4y half to D .2/. Sales he sales section of the Anco"e ,tate"ent are "ade up of all the sales throu1hout the 1iven period. %s is sho2n in the "odified state"ent of inco"e a4ove there is a section for credit sales per day. his 2as calculated 4y ta-in1 the total sales and dividin1 it 4y 38/ 4ecause the ori1inal fi1ures 2ere 4ased of the annual reports for Ford Motor Co. and, as such, there are 38/ days in a year. Af the nu"4ers had co"e fro" a =uarterly report the sales 2ould have then 4een divided 4y &2 938/ ) $;. Many ratios discussed 4elo2 deal 2ith values fro" the Anco"e ,tate"ent, and "ost of the" involve usin1 the sales nu"4er. he Profit Mar1in ratio is one of the "ost i"portant 4ecause, out of the sales "ade, it deter"ines the a"ount of profit "ade on each dollar of sales 1enerated in the 4usiness. E penses he e+penses section of the Anco"e ,tate"ent sho2s the different e+penses that are allotted durin1 the fiscal period. Hne of the "ost i"portant e+penses to pay attention to is the Cost of 3oods ,old 9CH3,;. he CH3, is the su" of all of the costs re=uired to ac=uire and prepare the 1oods for sale. % loo- at the CH3, for the years 2002 F 2008 sho2s a steadily increasin1 nu"4er, and, co"pared to the revenue 2hich is a steadily decreasin1 nu"4er, it helps to create ne1ative net inco"es 9or losses;.

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Net %ncome Iet Anco"e is si"ply the total revenues "inus the total e+penses of the 4usiness. Plain and si"ply Iet Anco"e is the total a"ount of earnin1s the 4usiness has after they account for all the outflo2s of "oney. %s sho2n in the "odified Anco"e ,tate"ent the Iet Anco"e ) Loss is sporadic throu1hout, and, alon1 2ith loo-in1 at the 4alance sheet fro" the section previous, the 2008 year yielded a ne1ative retained earnin1s 2hich "a-es sense 2ith a ne1ative net inco"e. /rofita0ility % 4i1 =uestion for investors is 2hether or not a co"pany is profita4le, and 4y analy5in1 4oth the 4alance sheets and the inco"e state"ent it is clear to see that Ford Motor Co. is havin1 trou4le "aintainin1 their profita4ility, and recent actions and reports have not encoura1ed investors. Ford<s Iet Anco"e for the year 2008 2as over D #$ 4illion dollars less than their inco"e a year 4efore, and over D #3 4illion less than the last four years co"4ined. here can 4e "any reasons for this. he first is the declinin1 sales and consu"er desire. Bust this year Ford 2ill 4e passed 4y oyota, a forei1n autoE"a-er slo2ly 1ra44in1 hold of the U.,. auto"otive industry, as one of the top "ost co"petitors in the United ,tates. oyota<s release of their ne2 pic-up truc- that rivals the si5e of the %"erican pic-up truc-s could possi4ly 4e part of the 4la"e for Ford<s lac- of sales and profit. he U.,. consu"ers are loo-in1 for "ore relia4le, "ore caterin1EtoEtheir needs truc-s. he difference 4et2een Ford and oyota is the !esearch and 0evelop"ent a4ilities.

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Cas) Flo- Statement he Cash Flo2 ,tate"ent is a report of the sources of cash to a 4usiness and to 2hat the cash 2as used for durin1 the period vie2ed. here are three "ain sections of Ford Motor Co.<s state"ent of cash flo2s6 the cash flo2s fro" operatin1 activities, cash flo2s fro" investin1 activities and the cash flo2s fro" financin1 activities. With these three sections you can calculate the cash and cash e=uivalents at the end of the period. Cas) Flo-s From Operating Acti!ities his section represents the cash that is 1enerated or consu"ed 4y the productive activities of a fir" over 2hatever period of ti"e. Hver the last four years Ford has had a cash inflo2 in the lo2 D 20 4illion dollar ran1e. @o2ever the cash inflo2s dropped 4y D ## 4illion dollars, and, as represented 4y the a4ove discussion of the year of 2008, this could possi4ly 4e a pro:ection of a lar1e decrease in sales. Cas) Flo-s From %n!esting Opportunities he net cash 9used in; ) provided 4y investin1 activities is the representation of ho2 "uch "oney the co"pany has received F or in Ford<s case lost F throu1h their investin1 activities. Fro" the years 2002 F 200$ Ford displayed an avera1e loss in their investin1 opportunities of D 2$,(&8 4illion. @o2ever, posted in 200/ Ford sho2ed an increase in investin1 strate1y and raised their inco"e to D (,$/( fro" investin1 opportunities. Cas) Flo-s From Financing Opportunities his section represents the "oney either spent or "ade fro" its stoc-s and 4onds. Ancluded in this section are the dividend payouts, "oney "ade fro" sale of stoc-, any "oney spent on 4uyin1 4ac- any stoc-s, any "oney it 4orro2ed and also any "oney it used to repay any previously 4orro2ed "oney. Fro" years 2002 F 200/ Ford posted an avera1e of a D $/,&'# loss on financin1 opportunities. hese losses are due pri"arily to su4stantial losses fro" short ter" de4t and principal pay"ents "ade on other de4t. Co"paratively those t2o cate1ories are the 4i1 losers of the sections. @o2ever, in 2008, Ford posted a positive D #/,2(3 4illion net increase in cash flo2s fro" financin1 opportunities, and this could 4e pri"arily 4ecause of hu1e proceeds fro" the issuance of ne2 de4t.

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!atio analysis:
Li.uidity: he current ratio assesses the co"pany<s a4ility to turn assets into cash 2ithin a year to "eet lia4ilities that "ust 4e paid 2ithin a year. % hi1her current ratio sho2s a hi1h a4ility to "eet that de4t 2ith li=uidi5ed assets. Ford<s current ratio over the last / years has 4een 1ro2in1 for the first 2 years, then dropped for their 3 last operatin1 years. his sho2s a drop in the a4ility to "eet their short ter" de4t 2ith assets turned into cash. Hne of the reasons for the drop in the current ratio is that Ford has 4een ta-in1 on de4t to finance their operations. heir increase in de4t and their sales of assets to "eet e+istin1 de4t caused their current ratio to drop. he %cid test "easures the i""ediate a"ount of cash to service the co"pany<s short ter" de4t. %n acid test should have a result over # to 4e considered to 4e 1ood, so a hi1her acid test sho2s a hi1h a4ility to pay of short ter" de4t 2ith cash. Ford<s acid tests has 4een under # over the last / years, there 2as an positive increase in 2003 4ut it then dropped do2n durin1 the ne+t 2 operatin1 years and had a sli1ht increase in 2008. he ratio 2as still under # and sho2ed a poor a4ility to service short ter" de4t 2ith cash. his could 4e for the reason that Ford has a ne1ative 2or-in1 capital and does not have a lot of cash lyin1 around to pay do2n de4ts, and ta-in1 on ne2 de4ts to finance de4t. he 2or-in1 capital is a "easure of ho2 "uch li=uid capital the fir" has in reserve to satisfy uncertainties and pay of short ter" de4t. % hi1her 2or-in1 capital nu"4er is preferred 4ecause this sho2s that the fir" has cash in reserve. Ford<s Wor-in1 capital has 4een ne1ative durin1 the last / years of operations. he last 2 years of operations the ne1ative 2or-in1 capital has 1ro2n su4stantially. Ford<s lia4ility out2ei1hs their assets, so any e+cess 2ould 4e used to pay do2n de4ts.

#8

/rofita0ility: he profit "ar1in is a "easure of ho2 "any percent of a dollar earned that the co"pany 1et to -eep as a profit. An Ford<s case their profit "ar1in 2as ne1ative in 2002 and 2as developin1 in a positive "anner the ne+t three years 4y 1oin1 to a positive one. An 200/ there 2as a recession in the profit "ar1in that too- it a little do2n, and in 2008 the profit "ar1in plu""eted do2n to an astonishin1 E'J he reason for this ne1ative profit "ar1in is 4ecause Ford<s e+penses in producin1 their cars are so "uch hi1her then their inco"e on the cars. ,o therefore their profit "ar1in is a ne1ative nu"4er, the "ore cars Ford sells the 4i11er trou4le they are in. he !H% or the !eturn on %ssets is a "easure of efficiency of the co"pany<s profits 1enerated fro" their assets. Ford<s !H% has durin1 the last / year operatin1 period 1one fro" a ne1ative nu"4er in 2002 to a 2orse nu"4er in 2008 2ith the !H% of E2./2'0J. he fact that the nu"4er is positive does not "ean that this nu"4er is positive for Ford. % !H% should 4e a "uch hi1her nu"4er than 0.2J. % co"pany should 4e 4et2een #0E#/J for their !H%. Because of Ford<s net loss in these years their !H% has 4een a ne1ative nu"4er and as lon1 as they are operatin1 2ith this loss they 2ill -eep havin1 a ne1ative !H%. he !H* in a co"pany is a "easure of efficiency and "easurin1 their return on e=uity. he !H* is the a"ount of return per dollar spent in e=uity. For Ford their !H* in 2002 2as a ne1ative nu"4er, it i"proved over the ne+t three years to a top of 2#.(J in 200$, 4ut dropped a1ain in 2008 to a ne1ative #$J. % hi1hly profita4le co"pany should have a !H* around 20J6 a healthy co"pany should have a !H* of over #0J Ford has a 4ad !H*6 this has to do 2ith the fact that in 2008 they reported a ne1ative e=uity. his is so"ethin1 that has affected the !H* 1reatly and 4efore they can rectify this pro4le" their !H* 2ill 4e ne1ative.

#(

Acti!ity: % co"pany<s inventory turnover "easures the nu"4er of ti"es the co"pany sells out their inventory per year. Ford has had a sta4ile inventory turnover over the last / years. heir inventory turnover has 4een around #( to #$ ti"es a year. he inventory turnover is 2hat you 2ould e+pect fro" a car "anufacturer, and does not need i"prove"ents. he avera1e collection period represents the avera1e nu"4er of days it ta-es the co"pany to collect accounts receiva4le. Ford<s avera1e collection period is around 2/0 days to 300 days. his is an avera1e for the auto"o4ile industry since they sell "ost of their products throu1h financin1 to other co"panies and 1ive the" lon1er paya4le deadlines so they 2ill have incentives to 4uy "ore of their product. otal asset turnover is the efficiency of use of assets 4y sho2in1 the resources re=uired to support sales. Ford<s asset turnover lies sta4ile around 0.$ to 0./ ti"es. Le!erage ratios: Anterest covera1e is the e+tent of availa4le earnin1s to cover interest pay"ents. Ford<s interest covera1e has 4een on a sli1ht increase since 2002 until 200$, after that year the covera1e dropped sli1htly and in 2008 it dropped drastically to E0.$$. he reason for the drop has 4een the loss of revenue for the years 2ith lo2 or ne1ative interest covera1e 2here Ford could not pay do2n interest or principle on their loans 4ecause of the lac- of cash. Cash flo2 to lon1 ter" de4t is the ratio that "easures the availa4ility of funds to pay for lon1 ter" lia4ilities. For Ford the cash flo2 to lon1 ter" de4t has increased for $ years since 2002, 4ut dropped drastically do2n to al"ost a third of the year 4efore in 2008. he reason for this 2ould 4e Ford<s ne1ative revenues and their ne1ative e=uity in 2008. Lon1 ter" de4t to e=uity "easures the a4ility for the fir" to pay do2n their de4t 2ith the e=uity that the fir" has so the a4ility to sell everythin1 and cover their de4ts 2ith the proceeds of the sale. % lo2er nu"4er is 4etter in this ratio. An Ford<s case their Lon1 ter" de4t to e=uity 2as 2& in 2002 then dropped do2n to ##.& in 200/. An 2008 ho2ever the lon1 ter" de4t to e=uity increased to 3$.$. his 4ecause of the ne1ative e=uity presented in 2008. With the losses incurred in the auto"o4ile sales and the ne1ative e=uity Ford 2ould have a hard ti"e coverin1 their de4ts 2ith e=uity or cash fro" operations. By ta-in1 on "ore de4t to cover old de4t they are settin1 the"selves up for a hard fall.

#'

/roforma Analysis %s seen in the profor"a state"ents in the appendecis of this report, Ford Mtor Co. re=uires plu1 in upards of D 28/,$#( 4illion dollars. hrou1h analy5ation in our financial state"ents and ratios discussed earlier in this report there is not a 2ay for Ford Motor Co. to finance this fundin1 throu1h retained earnin1s 4ecause, as of 2008, Ford does not have retained earnin1s to deal 2ith. Ris's Because of the place Ford Motor Co. holds in the U.,. "ar-et, "any of the de4tors 2ill not su4:ect the" to anythin1 hi1her than the opti"al interest rate. @o2ever, if they ac=uired hi1her interest rates, 4ecause of the 1reat a"ount of de4t already accrued 4y Ford, it could a"ount to serious reprocussions for their cash flo2. Ford Mtor Co. is =uite sensitive to the ta+ policies 4ecause of the co"petition 2ith forei1n "ar-ets an increase in the ta+ policy on do"estic vehicles 2ill affect their 4otto" line. @o2ever, a increase in the i"ported vehicles 2ould help 1enerate "ore sales for do"estic "ade cars. %ny increase in the ta+ation of their operatios 2ould further cripple their profit "ar1in. Because Ford is not in a sustaina4le 1ro2th pattern every car they produce is da"a1in1 their 4otto" line 4ecause they have a ne1ative profit "ar1in. %ny 1ro2th, at this ti"e, for Ford is the 2ron1 idea. Anstead, Ford "ust consolidate their efforts, as stated in the reco""endations section of this report, into "ore profita4le activities. Ford is in a sta1e of rapid decline, as discussed earlier in the financial state"ent analysis section. For Ford to 4eco"e "ar1inally profita4le a1ain, they "ust 4e prepared to li=uidate "any of their assets and sell off e+cess co"panies they o2n to focus "ore on profita4le actions. Financial Restructuring An the last five years, Ford has "aintained its current ratio under #, 2hich "eans the co"pany lac-s li=uidity in the sense that it cannot reduce its current assets for cash to "eet "aturin1 o4li1ation. At "ust rely instead on operatin1 inco"e and outside financin1. @o2ever, Ford "ade a ne1ative profit "ar1in in 2008, it sho2s to creditors that Ford does not sufficient a4ility to "eet its future o4li1ation. %ccordin1 to our forecast, it 2ill result in "ore de4t as it had increased over the past fe2 years, appro+i"ately D#82 4illions of lon1 ter" de4t in 2002 to D#(2 4illions in 2008. Continuin1 this direction alon1 2ith interest rate in the raisin1, Ford 2ill find itself 4uried in de4t if the co"pany continues to finance its operation fro" the 4an-s. We 2ould reco""end that Ford need to chan1e its financial policy. We find that the co"4ination of e=uity financin1 and de4t financin1 2ill help the co"pany durin1 this sta1e of the 4usiness. Ford is in the sta1e of "aturity and possi4ly decline. ,o Ford "ust ta-e advanta1e of its e=uity and attract "ore investors to the co"pany. An doin1 that, issuin1 additional e=uity is su11ested. %t the sa"e, it should reduce its lon1 ter" de4t 4alance to relieve so"e of the interest pay"ent. %t the sa"e ti"e, it opens up the capacity for future de4t financin1.

#&

An order to attract "ore investors, Ford "ust "aintain its cash dividends at an attractive level. By sayin1 that, it does not "ean the co"pany should increase its dividends pay out. An fact, Ford had reduced its dividends al"ost in half in 2008 co"pare to its past t2o years. Hn the other hand, Ford encounters the ne1ative retained earnin1s due to the net inco"e loss in 2008. hat e+plains 2hy Ford has the ne1ative stoc-holders< e=uity, 4ecause it depends too "uch on retained earnin1s to "a-e up its e=uity. ,ince this is the case, accu"ulated other co"prehensive loss in the 4alance sheet "ust 4e eli"inated. An the past t2o years, Ford reported over D#0 4illions reduction in its stoc-holders< e=uity fro" other co"prehensive loss.

20

Recommendations for Ford %fter a financial restructurin1 4y Ford, they 2ould need to increase their profit "ar1in to 4e a4le to stay in 4usiness. ,o"e of the 2ays they can do this are as follo2s6 one, cut do2n on the product "odels. ,tic- to a fe2 successful "odels and i"prove their =uality. By i"provin1 the =uality on the car they 2ill increase the de"and for it, and 2ith only a fe2 "odels to produce the product speciali5ation 2ould increase and =uality auto"atically follo2s. 2o, rene1otiate 2ith the la4or unions to "a-e the a1ree"ents that the Ford Motor Co"pany has 2ith the unions "ore sustaina4le for Ford, also so"e layoffs 2ould 4e necessary for Ford 2hen they are 1oin1 to cut their costs. Because of la4or union a1ree"ents Ford has an e+cess of 2or-ers that are ta-in1 up resources in the co"panies finances. By cuttin1 do2n in so"e of these costs it 2ould help Ford cut the costs of their production line and "a-e their products cheaper to "a-e and "ore profita4le. he cut in pay and 4enefits 2ill 4e thou1h on the 2or-ers, 4ut after a fe2 years of operation their pay and 4enefits 2ill 1o 4ac- up since the co"pany 2ould 4e doin1 4etter financially. his 2ould also ensure the :o4s of the re"ainin1 2or-ers in the future. By cuttin1 do2n on the :o4s of a fe2 people Ford can continue to e"ploy "any "ore in the future. he third and final point, Ford should consider to sell off so"e of their less productive divisions and su4 4rands. he su4 co"panies that they should sell off should 4e the ones that are a financial strain on Ford and not the ones that is "a-in1 a profit. By sellin1 off their cash co2s they are further decreasin1 Ford<s li"ited revenue flo2. By 1ettin1 rid of so"e of the less profita4le depart"ents Ford can focus on the ones that are left and start 2or-in1 on -eepin1 the" sustaina4le and profita4le and turn the co"pany around.

2#

%PP*I0*CA*,

K%ll nu"4ers are in "illions

22

REFERENCES
Fortune /00 %pril 30th edition %nalysis for Financial "ana1e"ent F @i11ins Ford.co" *d1ar filin1s site Ksite on calendarK

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