Introduction
Financial analysis involves the use of economic data to review and analyze the performance of a business for a defined period. The assessment involves ratio analysis to determine the stability, profitability, and viability of a company by comparing the results of one firm with another within an industry (Onas et al.,2020) . The purpose of the paper is to review and analyze the performance of two companies within the automobile industry in the United States. Ratio analysis of the two companies is done through an online ratio calculator XBRL. The two firms picked for financial performance analysis and comparison are Ford Motors and General Motors (GM).
Missing information
Financial data for Tesla and General Motors is the missing information on the XBRL excel sheet. Tesla has an entire balance sheet for 2019 missing. Besides, its 2018 income statement and balance sheet are missing. General Motors only has its 2018 income statement missing. The missing information is affecting all of the financial ratios being used to compare the performance of the three companies. It is not possible to make a comparison for Tesla since all the rates from profitability, liquidity, financing, and activity ratios are missing. Therefore, it effectively becomes a two-company comparison between Ford Motor Company and General Motors.
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Review of the financial ratios
Liquidity ratios
The current ratio as liquidity ratio assesses the ability of a company to meet its short-term obligation through application of existing assets (Tomczak,2014) . The desirable rate is that which is more than 1.0 because it shows the company has sufficient assets to clear short-term commitments. Analysts and investors check the ratio to ascertain how companies optimize current assets in their balance sheets to meet existing debts and other payables (Greco, 2020) . General Motors has a ratio of more than one for all the years under consideration. In 2017 the rate was 1.23,1.20 for 2018 and 1.16 for the year 2019. The figures are more than one signifying the company is in a position to handle its short-term obligations as they fall due. The ratio is declining throughout the two-year period. The current rate has dropped by 6 percent for the two years. The trend depicts a decreasing ability of the company to pay its short-term bills, which may force the company to rely on inventory sales to clear short term obligations.
On the other hand, General Motors has a current ratio of 0.88, which is less than one indicating that the company has difficulties clearing its short-term liabilities. The rate is less than the industry's average of 1.02, implying that GM is lagging behind its rivals in terms of liquidity. Ford Motor Company has maintained sufficient current assets throughout the years, with $114 million worth of current assets as compared to General Motors of $74 million.
The quick ratio is a liquidity ratio employed in assessing the capacity of a company to cater to its short-term obligations through utilization of quick assets (Tomczak,2014) . Quick assets are assets that are readily convertible to cash within a limited period of 90 days. A quick ratio of 1 is desirable since it indicates the capability of a corporation to meet short term charges with the available quick resources. Both companies have a quick ratio of less than one at 0.45 and 0.59 for Ford and General Motors, respectively. Though Ford has a slightly higher rate than General Motors, the ratio both companies may have challenges clearing the short-term obligations using their quick assets. The quick ratio for the automobile industry is 0.52, which in comparison, shows Ford is below competition while GM is in a slightly better position at 0.59. The reason behind a ratio of less than one is that both companies have higher current liabilities than their cash and receivables amounts.
The trend line for Ford's quick ratio shows a declining rate from a high of 0.52 to 0.45. As the volume of current liabilities continues to grow, from $90281 in 2017 to $98132 in 2018, the corresponding amounts of cash and account receivables are falling. That means that quick assets are declining in each successive year to cover the rising short-term obligations resulting to worsening ratio.
Financing ratios
Debt to equity ratio evaluates leverage levels of a company by revealing the amount of debt and equity financing employed by a company. It is a crucial leverage ratio that shows the ability of a company to raise further capital for growth. An ideal debt to equity ratio is between 1 and 1.5 though it varies in different industries (H.Sherman, 2015) . The variation is because some industries use higher debt financing than others. The debt to equity ratio is more than 6 for all three years for Ford Motors, standing at 6.78 in 2019. GM's rate is 4.36 in 2019, implying that these companies are highly leveraged and use debt capital to finance their operations. Ford Motors use debt capital as much as six times as its equity, which increases risk exposure. The company has to utilize this leverage efficiently to generate adequate cash flows to service debt. The automobile industry is capital intensive and its capital requirements cannot be met by equity financing only. Ford's ratio declined at first, in the year 2017 but recovered in the year 2018 due to increased shareholders' equity as the trend line shows, but the rising debt levels will cause a decline in the trend line in the future.
Times interest earned ratio assesses the company's abilities to service debt based on current income. Lenders employ this ratio to determine the company's capability to take more debt, with a figure of less than one indicating difficulties. However, a higher ratio is an indicator the company is in a strong position to absorb additional debt. Ford times interest earned rate ranges between 2.87 in 2017 to 0.88 in 2019, while GM and Tesla motors have a higher proportion of 37.10 in the same year. Ford Motors has higher leverage levels meaning that the interest payments are also high, contributing significantly to lowering the ratio. Low times interest ratio may limit Ford's ability to acquire more financing in the future as the rate shows its debt levels are at a tipping point.
GM and Tesla, on the other hand, have a healthy ratio of 37.10 and are attractive targets for financial institutions for financing since they are capable of absorbing more debt without risks of defaulting. The trend line reveals a declining ability of Ford Motors to service debts due to the falling levels on income. The increased debt levels are not translating to additional or improved profitability, a situation that is unpleasant to the company's management.
Activity Ratios
The asset turnover ratio is an efficiency ratio that analyses the capabilities of management to generate sales revenue through efficient utilization of assets. A higher rate is better though its industry-dependent—the turnover ratio for Ford range between 0.61 and 0.63 with the year 2019's ratio at 0.61. Likewise, GM's ratio is 0.60 for 2019. The rates mean that for every $1 worth of assets, each of the companies generate less than a dollar worth of sales revenue. Ford make 61 cents while GM earned 60 cents. Therefore, none of the two companies performed better than the other in terms of efficiency. However, this does not indicate inefficiency because the industry average in 2019 was 0.62. The automobile industry is an asset-intensive industry meaning that the overall asset turnover ratios are low. It is also be possible that the economic benefits of the additional assets have not been realized, and the ratio may improve in the future. The trend line depicts a decreasing efficiency in the use of assets to generate more revenue. The rate weakens by two percentage points from the year 2017.
The account receivable turnover ratio determines the effectiveness of a company's collection efforts in a period. As an efficiency ratio, it shows the efficiency with the management handle account receivables besides measuring how long it takes for a company to convert a credit sale to cash. A higher turnover ratio is an indication of aggressive collection efforts or a conservative credit policy or the presence of high quality and reliable customers (H.Sherman, 2015) . Likewise, a low turnover ratio is an indication of either uncreditworthy customers, ineffective collection efforts, rising bad debts, or an increasing number of debtors facing cash flow difficulties. In the case, Ford Motors has accounts receivable ratio of 15.26 in 2019. GM has a turnover ratio of 5.4, which is low as compared to Ford’s. The reason behind the GMs low ratio is because it maintains high levels of account receivable in comparison to sales.
In 2019, GMs accounts receivable was $26601 million as compared to Ford's levels of $9237million. GM maintains a huge non-performing debtor in its books. The company's account receivables dropped by a small margin of 0.93 percent from 2018 to 2019, implying that the high debtor's figure is contributing to its low account receivable turnover ratio. The trend of the ratio shows deterioration. In 2017 Ford Motors converted a credit sale in approximately 15 days, which has increased by an additional two days in 2019.
The average collection period refers to the time taken from making a credit sale to the time of payment. The ratio measures the efficiency of the credit department in granting credit and collection efforts. A low collection period is desirable since is reflects the effectiveness of the collection efforts, reduced credit time, and increased collection efforts. For an organization with steady sales and a constant customer mix, the average collection period maintains a consistent trend from one period to the next. Ford has an average collection period of 25 days for 2017 and 2018, which later decline to 24 in year 2019 while GM has an average collection period of 71 days, more than double of Ford Motors. Automobiles' industry average collection period for 2019 is 15 days. Therefore, both companies are performing worse than their competitors. Customers of both companies do not pay promptly, or they have relaxed their credit policy to counter falling revenues resulting to higher collection days. GM's situation is critical, and their collection efforts have failed as a result of poor credit policy decisions or relaxed collection efforts.
Inventory turnover ratio is an efficiency ratio that indicates the number of times in a trading period a company has replenished its stocks. A rate of 4 to 6 times in a year is an acceptable rate. A higher rate shows that a company is selling inventory items faster. A low ratio means that sales are small, and demand is declining. Keeping too much inventory may result in a lower rate. Also, the ratio shows that the company has tied capital in inventory. Ford Motors moved its stock 12 times in 2019, which is a decline of 6 percent since 2017 when it was 13 times in a year. GM turnover ratio is ten times. Therefore, Ford Motors sell more stock items on average than GM, which is translates to higher sales revenue.
Average days in inventory is the number of days a company holds its product stock before selling. A lower number of days represent an efficient usage of inventory since it shows the product sell faster. Fast selling inventory also means that product holding costs are kept at a minimum. Demand stimulation and reduction of idle stock could help reduce the time a company holds inventory. The average days' inventory for Ford Motors is 30 days in 2019 and 2018, while in 2017, the average days were 28. GM's stock takes 33.34 days to sell. The trend shows Ford Motors is staying with its inventory longer each successive year. A higher day in inventory ratio could be explained by declining sales effort or customers are experiencing economic hardships. The reason behind a lower number of days is better sales forecasting techniques, optimization of supply chain partnerships, and having practical marketing efforts.
Profitability ratios
Profitability ratios measure the efficiency with which a company makes use of the resources at its disposal to generate profits. Also, ratios indicate whether the company is efficient in its processes, the way it employs the assets at its disposal to generate returns to the stockholders. Profitability ratios are used to estimate the efficiency with which a company transforms sales revenue into profits (Prayitno & Roespinoedji,2020) . Gross profit margin measures how well a company controls the cost of production of its products. The charges include the cost of raw materials, conversion cost, and cost of labor. A higher ratio is better since it shows high-efficiency and translates to more money left to cover operating expenses and eventually higher net income.
Profit margin is a profitability ratio used to indicate the percentage of sales revenue that remains after catering for operating expenses. Investors use the rate to determine how effective are company efforts in translating sales revenue to net income. Thus, it reflects on the management's efforts to maintain efficiency in operations. A low ratio is an indication of inefficient processes and requires management action through budgeting and cost-cutting. The profit margin for Ford Motors was zero in the year 2019, a decline of 5 percent in profits within two years. The company's net income for 2019 was $ 8 million, from sales revenues of $ 155900 million. GM and Tesla also have a low return of 5 percent each in the year 2019. The operating expenses in the automobile industry are very high due to its high cash requirements to run the production plants and showrooms. Besides, the cost of sales takes more than half of the sales revenue.
Return on assets ratio is used to measure efficiency with which a company employ its assets in the production of sales revenue. A higher rate is indicative of an efficient and profitable business (H.Sherman, 2015) . Average rate of return above 5 percent is considered a fair profit. Ford Motors' return on assets for 2019 is 0.01 percent and has declined as the trend line shows from 0.78 percent in 2017, while GMs rate for the same year is 0.73 percent. Both of these return on assets is very low, implying that the businesses are not making more money as compared to investment in assets. The management is not efficiently utilizing the assets to lower costs of production or increase operational efficiency.
Declining productivity from the year 2017 has influenced heavily on Ford's profitability as net income dropped from a high of $4600 million in 2017 to $ 84 million, a 98 percent drop in net income. Moreover, due to the capital-intensive nature of the industry, these companies have considerable investments in assets, which could explain the low return on assets ratio. The industry average for the proportion in 2019 was 3.33 percent, and these companies underperformed due to the depressed incomes for the year.
Return on assets plus interest ratio incorporates interest expense on the basis that assets are acquired through a combination of equity and debt funding. Inclusion of interest expense creates compensation for the assets acquired using debt financing. A higher ratio shows increased efficiency on asset utilization. The rate for Ford Motors for year 2019 is 1.4 percent, while General Motors is 3.02per cent. GM has a higher ratio than Ford Motors due to the company has realized a higher net income than Ford Motors.
Return on equity assesses the ability of a company to utilize the capital contributed by equity stockholders efficiently. Investors evaluate companies' performance through this ration in determining the most suitable stock to invest. Investors prefer a higher ratio, which means higher returns in terms of dividends and higher prices in the stock market. (H.Sherman, 2015) The best ratio for investors is within the range of 15 – 20 percent. Ford Motors has a return on assets ratio of 0.06 percent in 2019. GM, on the other hand, has a ratio of 4.13 percent. The reason for Ford's low ratio is inconsistent profitability; the company's profits fluctuate from year to year, which increases shareholders' equity in the current year, thus reducing the ratio. Increasing leverage levels in Ford Motors has resulted in increased interest expense, leading to declining net income. Low net income results in a low return on assets ratio. The trend indicated a similar pattern of critically deteriorating performance from 5.93 percent in 2017 to 0.06 percent in 2019. Meanwhile, for GM, leverage levels are decreasing over the years, implying lo interest expense payments and a rise in net income, resulting in improvement in the ratio.
Equity Multiplier ratio is used to evaluate the number of assets financed by equity funds by comparing total assets to total shareholders' equity. Lower equity multiplier ratio is ideal because it shows a company is less reliant on debt financing to acquire additional assets and do not extra cash flows to meet debt obligation, unlike high-leverage companies. Ford Motors' equity multiplier is 7.44, while GMs is 5.65. The reason for Ford's higher ratio is because it has a more significant debt component in its books than GM. A high level of leverage translates to a high equity multiplier ratio. The trend shows the rate was improving, but as the company increased leverage levels and net income declined, the ratio deteriorates and start rising.
According to the statement of financial position presented, Ford's current liabilities have risen by $7851 million within the last three years to close the year 2019 at $98132 million. An explanation for this is the declining liquidity levels of the company, as explained by the current ratio, and quick ratio is forcing the company to delay payments, thereby causing an accumulation of short-term debts. The company may also have negotiated for an extended credit period with its suppliers and other creditors as liquidity level worsens. Ford Motors have adverse results in all significant areas of liquidity, profitability, activity ratios, and financing ratios. However, there are areas of strength, especially in the activity ratio of accounts receivable turnover and average collection period. Ford Motors has a decreasing average collection period of 24 days in 2019. Similarly, the company has a strong performance on the number of times its debtors clear their accounts to 15 times in 2019.
DuPont framework analyses the drivers behind the return on equity ratio. It has three rates combined into a single result. The Profit ratio show efficiency of operations, asset turnover, reveal the efficiency of asset use while financial leverage is represented by equity multiplier. The return on equity ratio is zero, and the profit margin ratio and thus, DuPont framework analysis for Ford Motors is zero. The result is that the financial performance of Ford Motors in 2019 is deteriorating and could hit critical levels due to declining key ratios of liquidity, profitability, and asset turnover, which, if not checked, could lead to bankruptcy.
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