General Motors is the biggest automobile manufacturer in the United States by market share. The company hold 18.01 per cent of the market by the end of quarter one in 2020. For comparative analysis of the company's financial performance, General Motors financial data of the year 2019 is compared with the data from Ford Motors from the same year. Ford Motors had the second largest market share by 15.1 per cent in the first quarter of 2020. The approaches adopted for comparative analysis of the two companies is the ratio analysis and valuation statistics. The two methods are selected because they help in performing a comprehensive review of crucial areas of company operations. Ratio analysis is the basis of the economic performance of the two companies. Key ratios analyzed include profitability ratios, ratios on activity, financing and liquidity ratios.
Ratio Analysis
Profitability ratios are used to determine the efficiency of the management in terms of using the resources of the company to generate profits. Gross profit margin is a crucial profitability ratio as it assesses the effectiveness of the production operations of the company (H.Sherman, 2015) . Cost of production includes the cost of raw materials and direct labour and utilities. If a company manages to keep these costs at a minimum, it achieves a higher gross profit margin. A higher ratio is desirable since it shows efficient costs of production and leaves adequate cash to cater for operational expenses of the company.
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The ratio is computed as follows:
Gross profit margin = Gross profit/sales revenue
General Motors = 26586/ 137237 = 19.37 %
Ford Motors = 21207 / 155900 = 13.60 %
General Motors has a higher gross profit margin than Ford Motors. The high ratio means that its vehicle manufacturing plant is more efficient than Ford Motors. The cost of production in both companies consume more than half of the sales revenue, leaving less than half of the amounts to cater to indirect production costs. Direct production costs are higher in Ford Motors at 86.4 per cent and 80.63 per cent of sales revenue at General Motors. Reasons for higher efficiency at General Motors include lower costs of raw materials and optimized production adjusting production in response to demand.
Return on equity is another profitability ratio that analyses the efficiency within which the company employs its assets in revenue generation. A higher rate shows an efficient and profitable business (H.Sherman, 2015) . As a rule of thumb, a 5 per cent ratio is considered an acceptable return. Investors use this ration to determine which company stocks to invest in since a higher rate imply higher dividend payments and stock price appreciation.
Return on equity = Net income / Average shareholders’ equity
General Motors = 6667 / 40326 = 16.53%
Ford Motors = 84 / 34598 = 0.06%
General motors have a high return on equity than Ford Motors. The reason for the higher ratio is a high net income as a result of reducing debt levels. Lower debt levels imply lower interest expense payments translating to higher net income. On the other hand, Ford Motors leverage levels are rising, and the debt obligations are negatively affecting the net profit.
Activity ratios measure the efficiency with a company that utilizes the assets in the balance sheet to ensure continued and improved revenue generation. They include asset turnover and average collection period. The asset turnover ratio assesses the ability of the management to utilize the company's asset to generate revenues efficiently. A Higher rate is preferable even though it is an industry dependent ratio.
Asset turnover ratio = Net sales / average total assets
General Motors = 137237/ 227688 = 0.60
Ford Motors = 155900 /257539 = 0.61
Ford Motors has a slightly higher asset turnover than General Motors. The rate means that both companies did not manage to make a dollar worth of sales per dollar invested in assets. General Motors managed to earn 60 cents while Ford Motors made 61 cents in the year 2019. The low ratio is an indication of inefficient utilization of assets. Still, with the way the industry is capital intensive, a low rate is possible as revenues are not commensurate with the investments in assets. Another reason could be both companies have not realized the economic benefits of the additional assets in the year.
The average collection period refers to the amount of time in days from the time a credit sale is made to receipt of payment. The ratio is applied in the measurement of the efficiency of the credit department in handling account receivables. Concerning the rate, a lower ratio is preferred.
Average collection period = 365 / receivables turnover
General Motors = 365 / 5.14 = 71 days
Ford Motors = 365/ 15.26 = 24 days
General Motors take a longer time, of 71 days in collecting its accounts receivable than Ford Motors. Relaxed credit policies and non-aggressive collection efforts could be the reason for the slow collections for General Motors. There is increased exposure to bad debts for the company, unlike Ford Motors, who promptly collect their average credit sale in less than a month.
Liquidity ratios are the rates that measure the firm's ability to pay its short-term obligation through the utilization of the current assets in the balance. They include current ratio and current ratio. Current rate quantifies the capability of a company to clear its short-term commitment through the application of the liquid assets in the balance sheet (Greco, 2020) . A current ratio of 1.5 to 2 is considered healthy. Analysts and investors check the rate to ascertain how companies optimize current assets in their balance sheets to meet existing debts and other payables.
Current Ratio = current assets/ current liabilities
General Motors = 74992 / 84905 = 0.88
Ford Motors = 114047/98132 = 1.16
General Motors has a ratio of below one, while Ford Motors has a healthy rate of more than 1. The results show that General Motors could struggle to meet its short-term obligation because its current assets do not adequately cover near term obligations.
Financing ratio such as debt to equity evaluates leverage levels of a company through comparison of the debt and equity amounts. The rate is used to determine if a company has additional capacity to take in more debt capital.
Debt to equity ratio = Total liabilities / Shareholders equity
General Motors = 182080 / = 45957 = 3.96
Ford Motors = 225307 /33230 = 6.7
The debt to equity ratio of General Motors is lower than that for Ford Motors, which imply that the company has utilized low debt levels in its capital structure than Ford, which is very high at 6.7. The company has debt levels at six times its equity level, which is a disadvantageous position due to the risks related to debt.
Graphical Representations of Ratio analysis comparison between General Motors and Ford Motors based on 2019 Financial Statements
Average collection period
Valuation Measures
The other comparative analysis approach is a comparison based on the metrics that measure the valuation of a company. These include market capitalization, enterprise value. Market capitalization is the value of all outstanding stocks of a company. It is determined by multiplying all number of outstanding shares by the share market price. General Motors market capitalization was $51.24 in 2019, and $46.83 in 2018 and $57.36 in 2017 while Ford Motors figures for the same period are $ 37.96, $31.14 and $50.68 in billion. The value changes reflect the volatility in the stock market price of the company ("General Motors Valuation measures and Financial performance", 2020) . According to the data, General Motors has a higher market capitalization than Ford Motors due to its higher price for its shares, $29.07 per share as compared to Ford's $6.19 per share.
Enterprise value is a more detailed and comprehensive valuation than market capitalization. It incorporates the market capitalization figure as well as short- and long-term debts, including cash and cash equivalents in the balance sheet. The enterprise value for General Motors was $136.49, $128.88 and $128.97 in 2017,2018 and 2017 respectively. On the other hand, Ford was valued at $ 160.07 in 2019, $151.44 in 2018 and $166.07 in 2017. Valuation data reveals Ford as more valuable than General Motors.
Graphical Representation of valuation measures
Enterprise valuation
References
Ford Motor Company (F) Statistics and Analysis . Finance.yahoo.com. (2020). Retrieved 1 June 2020, from https://finance.yahoo.com/quote/F/key-statistics?p=F .
Ford Motor Company - AnnualReports.com . Annualreports.com. (2020). Retrieved 4 June 2020, from http://www.annualreports.com/Company/ford-motor-company .
General Motors - AnnualReports.com . Annualreports.com. (2020). Retrieved 4 June 2020, from http://www.annualreports.com/Company/general-motors .
General Motors Valuation measures and Financial performance . Finance.yahoo.com. (2020).
Retrieved 4 June 2020, from https://finance.yahoo.com/quote/GM/key-statistics?p=GM
Greco, P. (2020). What are Liquidity Ratios? . The Daily CPA. Retrieved 2 June 2020, from
https://thedailycpa.com/2019/08/05/what-are-liquidity-ratios/ .
H.Sherman, E. (2015). A Manager's Guide to Financial Analysis (6th ed., pp. 41 - 85). American Management Association. .
