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Assignment II

Submitted to
Dr. Mohamad Mazboudi
EMBA 570

Prepared by
Ali Assad, Ibrahim Omeis

February 10, 2020

1. Analyze Ford’s Financial Performance.

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There are various measures to determine whether or not a company is in good

financial standing. The below that will be analyzed to make a proper decision:
 
1. Liquidity.
2. Efficiency.
3. Profitability.
4. Growth.
5. Solvency. 
 
After analyzing the Exhibits provided for, Ford’s 2016 and 2017 we can conclude
the following:

1. Liquidity:
Determined by how quickly a business can convert its assets into cash. In
order to measure liquidity, we utilize the “Current” and “Quick” ratios.

Current Ratio: measures current assets (those that can reasonably be

converted to cash in one year) - Current Ratio = Current Assets / Current Liabilities
The current ratios are between 1.23 and 1.20, respectively.  this means that the
business has more current assets than liabilities to covers its debts. A current
ratio below 1 means that the company doesn't have enough liquid assets to
cover its short-term liabilities.
This indicates that Ford Company has enough liquid assets to pay its short-term
commitments. In other words, Ford Company has a strong working capital. 
 
 Quick ratio:
It measures the capacity to pay its current liabilities without needing to sell its
inventory or get additional financing
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Also, we should analyze the quick ratio. In this case, Ford’s quick ratio for years
2017 and 2016 are 1.08 and 0.55, respectively. A quick ratio of less than 1. That
means the company may not be able to fully pay its short term debt. Ford held
are reasonable quick ratio for 2017 and improved from 0.55 in 2016 to 1.08 in 2017.

Cash Ratio: 0.41 (2016), 0.43 (2017)

The cash ratio assesses an entity's ability to stay solvent in the case of an
emergency. If the result is equal to 1, the company has exactly the same amount
of current liabilities as it does cash and cash equivalents pay off those debts
In this situation, the company cash ratio is less than 1. This means there are
more current liabilities than cash and cash equivalents. There is insufficient cash on
hand that exists to pay off short-term debt
2. Efficiency

Cash Conversion Cycle (CCC): expresses the time (measured in days) it

takes for a company to convert its investments in inventory and other resources
into cash flows from sales. Cash Conversion Cycle = DIO + DRO – DPO
The most important step to analyze if Ford is efficient is by analyzing how well
they have been utilizing their assets to their disposal. In other words, it tells us how
quickly and efficiently Ford can buy, sell and collect money.
 To evaluate the efficiency within the Ford Company, we can calculate the cash
conversion cycle by the following:
 Adding days of inventory and days receivable and then subtracting days
payable. This computes to -6 in 2016 and prolongs to 112 in 2017 which is a very
poor indicator. (very long CCC) 
 The cash conversion cycle shows the time it takes for a company to convert its
investments in inventory into cash flows from its sales. We typically would want to
see a steady or decreasing cash conversion cycle.
 Ford’s CCC has relatively gotten worse from 2016 to 2017, thus making that
year inefficient.
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3. Profitability between 2016 and 2017:

Analyzing Gross Margin:

 An appropriate gross margin is between 13-21%. Ford’s gross margin is lower
than ideal for both years and declined from 2016 to 2017. 
 The operating margin ratio measures the profit a company makes from their
standard core functions, Ford’s operating margin ratio for both years are quite
low, regarding that good OPM ranges from 10-12%. Moreover, Ford’s net
income margin is also considered very low with ratios for 2017 and 2016 being
4.9% and 3.1%, respectively, 5% or lower of net income margins are considered
poor.
 Return on equity (ROE) and return on assets (ROA) are also good measures of
a company’s profitability. They can help to determine how efficient the company
is using its assets to generate profit. Ford’s ROE in 2016 was 15.9% and
increased to 21.8% in 2017.
 The ROE’s good range is between15-20% . In this scenario, Ford’s ROE for both
years have been acceptable in range and improved in 2017. 
 A company that requires a large initial investment will generally have a lower
return on assets. Ford’s ROA went from 1.9% in 2016 to 3.1% in 2017. Although
there was improvement throughout the year, their ROA ratio is still relatively low. 
 An ROA of less than 5% is considered to be low. 
 Ford’s one-year sales growth there was a jump from 0.7% in 2016 to 3.3% in
2017 however a good sales growth of a large company should fall between the
ranges of 5-10%. Ford had achieved a 3.3% in 2017 is still lower than the
acceptable range.
 Net Profit Margin is good at seeing efficiency of the company. Generally , a net
profit margin of 10 % is considered average and 5 % margin is low. The numbers
show that Ford’s net profit margin was low in both 2016 (3.1%) and 2017 (4.9%)
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4.     Solvency:
 
 A company’s solvency can also be called financial leverage is a method to
measure how the company has been able to properly handle its borrowed money
and its interest
 Analyzing Ford’s case financial leverage, we can conclude that the debt to total
assets is relatively constant from 0.88 in 2016 to 0.86 in 2017. Since the ratio is
less than one, it means a greater portion of its assets are funded by equity.
 Ford’s leverage ratio went from 7.14 to 5.38 within the two years, showing slight
improvement. A ratio of 0.5 or less is ideal meaning no more than half the
company’s assets should be financed by debt.

 0.6 ratio and above is an alarming indication of the company's finical situation
since this proposes a risk that the company could not generate enough cash flow
to compensate its debt. In general a ratio of 0.4 or lower is considered good debt
ratio

2. What do you think are the major financial strength and the major
financial weakness of Ford? Explain your answer.

Ford Company is a strong well-established company. Many strong factors make

this iconic company a significant game-changer in the automotive industry.

Strengths:

 Ford Motor Company has years of experience under its belt and continued to
stay competitive throughout these past decades. From being one of the first in
the automotive market, Ford created a production method called Fordism, the
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main objective of this strategy is to facilitate mass production by implementing an

efficient system
 Ford has also utilized a lean inventory by creating vehicles “just-in-time”. This
lean strategy in manufacturing leveraged Ford factories to produce vehicles in a
leaner environment and with efficient productivity.
 A strong brand image focused on innovation and quality leading to customer
loyalty and high level of brand equity.
 A well managed supply chain with manufacturing facilities expanded all around
the globe
 Its product portfolio is very large ranging from SUVs, trucks, cars to luxury
vehicles.
 Strong position in international markets like U.S. and china
 Its critical strengths also include strong marketing and branding with consumer
friendly brands.
 It believes in heavy spending on research and development especially in
electric vehicles due to which it has gained leadership position in electrical
vehicles.
 It has a culture of maintaining a high performance workforce.
 Teamwork is the most important priority which is based on employee
participation.

Weaknesses:

 The obvious weaknesses are the stated recall of vehicles which led to the share
price drop, Fords lack of strong quality assurance and quality control have
caused a significant number of vehicle recalls which resulting in the distraught
shareholders reconsidering their investing decisions. 
 Its market position is not strong in emerging markets like India.
 It has higher cost as compared to competitors as it does not have an effective
cost management system
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3- As John Smith in January 2018, based on the information given in the

case and your above analysis, would you buy more shares of Ford or would you
sell those shares and buy shares of other competitors (s) listed in the
case? Explain your answer.
If I am John Smith, I would consider selling the Ford stock, and my decision is
based on the financial ratios that have been analyzed during the 2016 and 2017
years.
I would most likely invest in other companies such as Toyota Company, as a
matter of fact if we analyze Toyota financial ratios, those ratios are strongly
competitive compared to Ford's ratios.
 In most aspects, Toyota’s numbers are significantly better. Their quick and
current ratio falls within ideal ranges. Moreover, Toyota’s OPM has slightly
decreased from 2016 to 2017 but is still at a better standing than Ford’s.
 Also, we can analyze that Toyota’s net income margin, which falls within an ideal
range, indicating appropriate profitability.
 In terms of growth, both companies have demonstrated a decent percentage of
growth from 2016 to 2017. However, Toyota’s ratio is significantly higher than
Ford’s, presenting a more promising growth.
Toyota’s debt to assets ratio is closer to 0.5 than Ford’s, indicating that a little
more than half of their assets are financed by debt.