Abstract
The paper aims to discuss the financial analysis of General Motors and Ford Company Incorporation and it starts by giving out a brief introduction and history of the two companies. Then financial ratios for the two companies for the years 2018 and 2019 are conducted being guided by data from the provided financial statements. The ratios used to evaluate the financial health in this paper are liquidity ratio, solvency ratio, profitability ratio, DuPont analysis and a conclusion is drawn that General Motors Inc. was financially stronger than Ford NMotors
Key words : Ratio Analysis, DuPont Analysis, Profitability Ratio, and Financial Statements.
Introduction
Financial ratios are used to compare performance of companies in the same industry and they are critical for stakeholders in making important decisions. Some key ratios used by investors include; profitability ratios, leverage ratios, solvency ratios, and liquidity ratios. All these ratios could be calculated using the data in the financial statements of the company
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History and Background
General Motors
The company was established in 1908 under leadership of William Durant with an aim of consolidating various motorcar companies such as Buick, Oldsmobile, Cadillac, and Pontiac (Debord, 2019). Other brands like Chevrolet, Fisher Body Company and Delco Products coming in at later stages. The activities of these brands were coordinated under one roof and the company became the largest automobile brand with sales of the company skyrocketing. The company grew beyond America expanding to Europe, Asia and in later stages making its way to Africa (Debord, 2019). The emergence of Japanese automobiles created severe competition to GM between 70’s and 80’s but it made its recovery in 1996. The company in 2010 regained its title as the largest automobile maker in the world.
Ford Motor Company Inc.
Ford Motor Inc. was established by Great Henry Ford in 1896 with an objective that every American would at one stage own his/her car (Brian, 2013). The company in 1908 developed a Model T that proved to be a breakthrough for Henry and he decided to expand his business. The company in 1950s and part of 1960’s diversified its operations focusing on its automotive and financial services. The company was able to survive the economy recess and decided to focus on crossover vehicles, SUVs, and pickups.
Ratio Analysis
We begin by looking at the Liquidity Ratio where we shall use Current Ratio, Quick Ratio, Days inventory Turn Over, and Accounts Payable Turn Over.
Current Ratio
A current ratio which is greater than 1 indicates that the company is in a position to meet its short-term financial obligations (Jan, 2019). With the two companies Ford Motor had a current ratio of 1.2 in 2018 but slightly dropped to 1.16 in 2019 while in 2018 General Motors had 0.92 Quick Ratio in 2018 which dropped to 0.88 in 2019. Between the two companies Ford Company was in a better position to finance its current obligations using the available assets than GM.
Quick Ratio
A quick ratio which is greater than 1 indicates that the company is in a position to meet its short-term obligations (Jan, 2019). With the two companies Ford Motor had a quick ratio of 1.08 in 2018 but slightly dropped to 1.05 in 2019 while in 2018 General Motors had 0.88 Quick Ratio in 2018 which dropped to 0.76 in 2019. Therefore, Ford Company was in a better position to finance its current obligations using the available assets than GM.
Days of Inventory Outstanding (DIO)
This ratio helps in establishing the cost effectiveness the company employs in managing the business and to be specific is establishing how the inventory is managed. The shorter the days the company takes to convert the inventory in to actual sales the more effective the management is. It took GM 31 days in 2018 to convert inventory to sales while in 2019 it took it 33days to transform the inventory to revenues. On the other hand Ford Company took 30 days in 2018 and 2019 to convert inventory to revenues. This means that Ford Company is more efficient in inventory management than GM.
Solvency Ratios
Under Solvency ratio we shall discuss Liabilities to Assets Ratio, liabilities to Shareholders Equities, Long-term debt to Shareholder’s Equity ratio, and Interest coverage ratio.
Liabilities to Assets Ratio
In 2018 Ford Motors Debt to Asset Ratio was 0.86 while that of GM was 0.81 while in 2019 Ford Motors Debt to Asset Ratio increased to 0.87 while that of GM dropped to 0.80. This means that Ford Motors is more leveraged than General Motors but the two companies are operating safely as no company is operating at 1.
Liabilities to Shareholders Equity Ratio
General Motors Company has a lower debt to equity ratio with 2018 recording 4.31 and 2019 recording 3.96. Ford Motors has a higher debt to equity ratio of the two companies with 2018 recording 6.13 and 2019 increasing to 6.78. This implies that Ford Motors can easily service its debts and is using “obligations to increase equity returns” (xxx,2017).
Long-term Debt to Shareholder’s Equity Ratio
The company with high ratio indicates higher business risk as the company is required to meet the principal amount and its obligations as it continues with the operations (Jan, 2019). From the two companies GM looks safer with 2018 recording 2.39 and 2019 recording 2.11. on the other hand, Ford Motors records higher ratios of 3.47 and 3.83 in 2018 and 2019 respectively.
Interest Coverage Ratio
The ICR for Ford Motors in 2018 means that in 2.61 times the company can repay its interests with the operating profits while General Motors in 2018 would take 6.79 times to repay its interests. In 2019 Ford would repay its interests in 0.56 times using its profits while GM would repay in 7.01. this means that Ford company is at safer position than GM.
Profitability Ratio
Return on Assets
From the workings it indicates that GM utilizes its assets more efficiently than Ford Motors with GM in 2018 and 2019 recording 3.52% and 2.92% respectively while Ford Motors recorded 1.44% and 0.03% respectively.
Profit Margin Ratio
General Motors had better profit margin Ratio than Ford Motors with the years 2018 and 2019 recording 5.38% and 4.80% respectively. Ford Motors in 2018 and 2019 recorded 2.30% and 0.05% respectively.
Total Asset Turn Over Ratio
General Motors has higher asset turnover ratio than For Motors with 208 having 9.06 and 2019 having a ratio of 8.43. Ford Motors in 2018 it had a asset turnover ratio of 8.13 and 2019 it had a ratio of 7.84. This means that GM is operating more efficiently than Ford Motors.
Return on Equity Ratio
GM had a better ratio on ROE as compared to Ford Motors with 2018 having 18.71 and 2019 14.32% of ROE. Ford Motors in 2018 it recorded 10.27% while 2019 ratios dropped massively to 0.25%. This means that if you invest in GM you will be able to generate more value of your money than investing in Ford Motors.
Vertical Analysis
For General Motors we start by looking at income statement and a decrease in automotive revenues by -8.4% could be witnessed while the GM financial revenues increased by 3.69%. With increment in Total Operating expense by 18.90% and income tax expense by 38.36% meant that the company witnessed a -20.29% decrease in profits. Ford Motors witnessed a decrease in revenues by 2.85% with total expenses decreasing by 1.16% that led to the company having a massive decrease in operating income by 458.01%. Ford therefore, suffered most in 2019 than GM
Horizontal Analysis
According to Dillon (2019) “Formula = (Amount in Comparison Year –Amount in Base Year) / Amount in Base Year x 100%”.
The base year in doing horizontal analysis is 2018 for the both companies it is established that the companies witnessed significant decreases in revenues and that could be attributable to economic shifts.
DuPont Analysis
This is an extended examination of ROE to determine what causes it to look the way it looks (Anonymous, 2016). As shown in the excel sheet shows that General Motors in 2018 had a better chance than Ford Motors and the situation worsened further for Ford Motors in 2019.
Conclusion
The two companies have excelled in automotive industry for long period and using the ratio analysis it could be witnessed that each company different ratios showing strengths and weaknesses of each company. Ford Motors is performing better on liquidity aspects but it has been well beaten in terms of leverage and profitability by General motors. It can be concluded that General Motors is standing a better chance and has high financial health than Ford Motors
References
Anonymous (2016). DuPont Analysis: Interpretation, Example, Formula, Calculator, 3 & 5 Steps . Retrieved from https://www.elearnmarkets.com/blog/dupont-analysis/
Brian, R. (2013). The Birth of Ford Motor Company .
Debord, M. (2019). The rise and fall and rebirth of General Motors (GM). Retrieved from https://africa.businessinsider.com/lifestyle/the-rise-and-fall-and-rebirth-of-general-motors-gm/qe7tpth
Dillon, V. (2019). How To Perform Horizontal And Vertical Analysis Of Income Statements . Retrieved from https://www.vintagevalueinvesting.com/perform-horizontal-vertical-analysis-income-statements/
Jan, O. (2019). Financial Ratio Analysis. Retrieved from https://xplaind.com/421478/financial-ratios
