Financial Analysis: General Motors and The Ford Company

Introduction

General Motors Company (GM), an American multinational automobile corporation

headquartered in Detroit, Michigan. Not only does GM fabricate, manufacture, market, and

supply vehicles and their parts, they also provide financial services. GM has over 35 different

production plants located all around the world. They produce vehicles under 13 different brand

names. Some of the more common brands here in the United States include Chevrolet, Buick,

GMC, and Cadillac. GM employs more than 210,000 employees worldwide and conducts

business in over 120 countries. From 1931 to 2007, GM was the market leader in vehicles sales..

In 2009, GM dropped several brands and closed some more commonly known ones like Saturn,

Pontiac, and Hummer. In 2010, GM re-organized and made one of the world’s largest initial

public offerings. They were profitable later that same year. GM has earned the spot as the largest

automaker in the United States (www.gm.com).

The Ford Motor Company, referred to as Ford, also an American multinational automaker.

Ford’s corporate headquarters are located in Dearborn, Michigan and was founded in 1903 by

Henry Ford. The Ford family still controls Ford Motor Company today. Ford, also been in the

commercial vehicle, owns a luxury brand sold under the name, Lincoln. Ford also owns two

other brands, Troller and FPV, less commonly known here in the United States. Ford also owns

stake in several other car manufacturers including Mazda, Ashton Martin, and Jiangling. Ford

has several joint-ventures worldwide with less commonly known brands. Ford maybe the second

largest United States based automaker but it was considered to be one of the most influential

companies in the history of the United States (www.ford.com).

Financial Analysis: General Motors and The Ford Company

Financial Analysis Objectives

The principal objective of this financial analysis was to compare the 2011 to 2013 financial

statements of the two of largest American automakers, GM and Ford. This study examines GMs’

and Ford’s balance sheet and income statements by means of horizontal and vertical analysis.

Vertical analysis, also known as common-size analysis, conveys each line item on a financial

statement as a percent of the base amount for the same year. Another method used to compare

the percentages was by horizontal analysis. In horizontal analysis, every amount given was

compared to the selected base year (oldest). For both company, 2011 was the base year. Year-to-

Year change analysis also helped explain the change within the different year percentages.

Lastly, the study includes various financial ratios, which study GMs’ and Ford’s liquidity, long

term debt paying ability, profitability, investor analysis, cash flow, projected balance sheet and

income statement.

Common Size Vertical Analysis: Balance Sheet

Using common size vertical analysis, we compared GMs’ 2011 to 2013 balance sheets against

Ford’s. GMs’ total current assets for the three year average were 47%. It increased from 46% in

2011 to 49% in 2013, almost 4%. The increase in total current assets was largely due to the

increase in other current assets, a 15% increase from 2011 to 2013. Total liabilities for GMs’

three year average were 74% and saw a very small decrease of about .5% from 2011 to 2013.

From the year 2011 to 2013, GM experienced approximately 10% decrease between post-

retirement benefits other than pensions and pensions (combined). GM was paying less money to

their employees after retirement in 2013. The average total equity (deficit) for the three years

was 26%. GM saw a decrease of almost 3% in additional paid-in capital and preferred stock, and
Financial Analysis: General Motors and The Ford Company

an increase of almost 3% in retained earnings, and accumulated other comprehensive income.

Ford’s common-size balance sheet reflects a three year average of total current assets at 75% and

an average of 29% of total current liabilities. Ford’s total current assets saw a small increase due

to the small increase in inventories, marketable securities and net investment in operating leases

(.5% to 2%). Ford’s total liabilities decreased in 2011 from 92% to 87% in 2013. A 4% decrease

in total automotive non-current accrued liabilities & deferred revenue attributed to this decrease

in liabilities from 2011 to 2013. Ford’s three year total equity (deficit) average was 10% and

increased from 8% in 2011 to 13% in 2013. This was the result of an increase of almost 4% in

retained earnings (accumulated deficit).

Figure 1 Current Assets for GM and Ford

A balance sheet comparison of the two companies represent that Ford’s percent of current assets

was significantly higher than General Motors. The total current asset average for Ford was 75%

compared to GM’s 47%, which shows a better liquidity appearance for Ford (Figure 1).

Additionally, Ford’s 2013 total liabilities are higher than GMs’, largely due to the fact that

Ford’s long term debt was almost 30% higher. This means that GM’s long-term debt ability was

better than Ford’s. Ford’s stockholder equity was lower than GMs’ due to higher total liabilities,
Financial Analysis: General Motors and The Ford Company

which means that Ford’s financial performance and debt paying ability was not as decent as

GMs”.

Common Size Vertical Analysis: Income Statement

GMs’ total automotive sales & revenue for the three year average was 99%. In 2011, it averaged

at 99% (sales) and by 2013; it averaged at 98%, almost a 1% decrease. The three year average

for the automotive cost of sales was 89%. In 2011 and 2013, automotive cost of sales was

relatively the same. However, in 2012, automotive cost sales increased by almost 6%. GMs’ total

three year average cost and expenses was 104% and saw the highest increase in 2012 when it

reached 120%. This upsurge, 18%, was the result of the significant goodwill impairment charges

increase. During the same year, 2012, GMs’ operating income saw a 20% loss, which impacted

their three year average, total loss of 4%. GMs’ three year average income before taxes had a

total loss of 4%. Again, in 2012 they experienced a substantial loss, 20%. Income after income

taxes averaged at 4% and their three year average net income was 5%. GM dropped net income

to almost half in 2013 from 2011 and although GM experienced significant loss in 2012, they

gained 23% due to income tax returns.

Ford’s total automotive revenue was 94% for the three year average and stayed almost same all

three years. Ford’s three year average automotive cost of sales was 84%, steadily increased from

83 % in 2011 to 85% in 2013, a 2% increase. Their gross profit average 17%, was at its lowest

point at 15% in 2013 because the automotive cost of sales for that year. Similar to GM, Ford’s

selling, administrative, and other expenses were around 9% during all three years of analysis.

Operating income averaged 4.5% and saw its best year at 5% in 2011. Ford’s income before
Financial Analysis: General Motors and The Ford Company

income taxes averaged 6%, Ford’s net income before non-controlling interest decreased from

almost 15% in 2011 to almost 5% in 2013. This was mainly due to the 8% returns on income

taxes in 2011.

Comparing automotive sales and revenue, GM had a better three year average of 99% verses

Fords of 94%. However, automotive cost of sales between GM and Ford also had a 5%

difference, GM having the higher automotive cost of sales. Ford had an average operating profit

of 4% whereas GM experienced average operating loss of 4%. GM also faced an average loss in

income before income taxes at 4%. Again, ford gained 6%. Net income for GM was

approximately 4.5% compared to Fords 8%.

Figure 2 Net Income for GM and Ford

Ford’s net income, (Figure 2, above), before non-controlling interested obtained an 8% when

GM ended at a loss less than even half a percent. Net income for Ford ended at an average of 8%

and GM at 5%. In order to improve both Ford’s and GMs’ net income, both companies need to

reduce their automotive cost of sales.

Financial Analysis: General Motors and The Ford Company

Comparative Horizontal Analysis: Balance Sheet

From 2011 to 2013, GMs’ total current assets increase by a total of 35%. This significant

increase is from the 505% surge from 2011 to 2013 in restricted cash and marketable securities

total financial services sector long-term debt and the 1487% in other current assets. In

comparison, total assets increased 26% from 2011 to 2013. This was due to the 1337% increase

in other total assets and the 95% decrease in goodwill from 2011 to 2013. Intangible assets also

saw a substantial decrease from 2011 to 2013, almost by 50%.

Both total current liabilities and total liabilities saw roughly a 27% increase from 2011 to 2013.

GM’s debt, both short term and long term, saw the largest upsurge from 2011 to 2013. Short

term debt saw the highest increase of 741% from 2011 to 2013 and 550% of that increase was

from 2012 to 2013. Long term debt increased by 610% from 2011 to 2013. Long term debt

increased by almost 300% each year from 2011 to 2013. Pensions in total liabilities increased by

10% in 2012 but saw almost a 20% decrease in 2013. This is because the pension and post-

retirement benefits both have reduced a 23% and 14% respectively. From 2011 to 2013, GMs’

total equity rose by 24%. Retained earnings increased by 92%. Other accumulated

comprehensive income decreased by 47%.

Ford’s cash & cash equivalents decreased by 16% from 2011 to 2013, however; Ford’s total

current assets grew by almost 14% from 2011 to 2013. This overall increase was from the surge

of other current assets like marketable securities, finance receivables, other receivables, net

investment in operating leases, and inventories. Each line item in current assets increased over a
Financial Analysis: General Motors and The Ford Company

total of 10% or more from 2011 to 2013. Net Investment in operating leases had the most

significant increase of 56% from 2011 to 2013.

As for total liabilities, there was an average of increase 8% from 2011 to 2013. This increase is

due to the 20% increase in total automotive sector long-term debt payable after one year and

total financial services sector long-term debt. Ford’s total current liabilities only had a 2%

increase from 2011 to 2013. Ford’s total equity increased by 75% from 2011 to 2013, this large

increase is due to 205% increase in Ford’s treasure stock in 2013. Ford’s retained earnings also

saw a significant increase of 82% over the base year.

Ford’s total current assets grew by 14%, while GMs’ total current asset increased by 35%. GM

saw almost a 30% increase in cash & cash equivalents, while Ford saw 16% decrease in cash &

cash equivalents. Two other significant increases for Ford from 2011 to 2013 was net investment

in operating leases and inventories, while GM saw a significant loss of half for marketable

securities and 3% decrease for equipment on operating leases. For total assets, GM saw an

additional increase of 13% over Ford.

GM reported a higher increase in total liabilities vs Ford. GMs’ total liabilities increased by 27%

whereas Ford reported a 7% increase. Both saw significant increases in long term debt from

2011 to 2013. Ford’s total equity increased by 75%; while GMs’ rose by 24%. Both Ford and

GM saw significant increases in retained earnings, each experience over an 80% from 2011 to

2013. In addition, in 2013 Ford issued 300% more treasury stock than in 2011. GMs’ preferred

stock came down the same year by 50. As for non-controlling interest, both Ford and GM saw
Financial Analysis: General Motors and The Ford Company

decreases from 2011 to 2013. GM saw a 35% decrease in non-controlling, while Ford averaged a

25% decrease.

Comparative Horizontal Analysis: Income Statement

GM’s net revenue and automotive cost of sales both increased by 3% in 2013 from 2011. GMs’

financial operating expenses & other expenses saw a significant increase of 54% in 2012 and

another 161% in 2013. Total cost and expenses increased 26% in 2012, but in 2013, total cost

and expenses decreased by 22% when compared to 2012. It ended at 104% in 2013. In 2012, GM

experienced an operating income loss of 537% but by 2013, it had an operating profit of 91%

compared to 2011. This loss occurred because of the upsurge in goodwill impairment charges.

Income before taxes in 2012 total loss of 506% compared to the base year and eventually

increased to 125% in 2013. Income after income taxes decreased 13% from 2011 to 2013. The

net income experienced a 42% decline, which can be explained by tax returns and non-

controlling interest.

Ford’s total sales revenues increased a total of 8% from 2011 to 2013. In a similar pattern,

automotive cost of sales increased by 10%. Gross profit saw a 5% decrease from the base year.

As for operating income, there was a 9% loss in 2012. It then decreased again but by another

13% in 2013. An overall of a 22%. Income before income taxes saw a 19% loss from 2011 to

2013 and net income before non-controlling interest saw a 65% loss. Income before income

taxes and net income before non-controlling interest suffered these deficits after a noticeable

decline in financial services provision for credit and insurance. Both of these caused Ford’s net

income to decrease by 65% in 2013.

Financial Analysis: General Motors and The Ford Company

GM had a better average generating income than Ford did from 2013 to 2011. Both the

companies saw a decrease in net income, Fords net income reduced by 65% whereas GM’s net

income reduced by 42% when compared to base year. However, Ford’s total sales ended at 8%

higher in 2013 than 2011 and GM only increased by 4%. GMs’ operating income decreased by

10% in 2013. Although, Ford saw a larger decrease in their operating income, 22% decrease

from the base year of 2011.

Liquidity Ratios

Liquidity ratios are used to measure the short term debt paying ability of any business firm.

Liquidity ratios focus on company’s ability to fulfill their duties in a operating period. If a

company was unable to meet their short term obligations, it will have difficulty in meeting its

long term obligations. Liquidity ratios provide investors with an idea of how stable a company

truly was.

Collection Period - Days’ sales in receivables is a measurement of the average number of days

that a company takes to collect their revenue after they have made a sale. GMs’ three year

average number of days for days’ sale in receivables was 24 compared to Ford’s 217 days. The

standard benchmark for average number of days to collect receivables was 30 days. GM falls

within the standard benchmark of 30 days where Ford is far from being close to the 30 day

standard. It is in the company’s best interest to collect outstanding receivables as quickly as

possible. The accounts receivables turnover ratio explains how many times in a year a company

collects payment. The accounts receivables turnover average for GM is 15.34 times per year and

for Ford it was 1.72 times a years.

Financial Analysis: General Motors and The Ford Company

Days Sale In Inventory – The inventory turnover ratio examines, how efficient a company was in

turning around its inventory. GMs’ average inventory turnover was 9.63 times whereas Ford’s

was at 17.59 times a year. A higher inventory turnover is better as it shows Ford is much more

efficient in managing their inventories. Days’ sale in inventory tells an investor how many days

a company takes to sell its inventory. GM takes 38.79 days in comparison with Ford which takes

21.78 days to sell off its inventory.

Operating Cycle and Working Capital - Operating cycle, the period of time that passes between

the acquisition of goods and final recognition, resulting from sales and subsequent collections.

The operating cycle for GM was 61.74 days and for Ford it was 233.21 days. This reveals to

investors that it takes 233.21 days for Ford to turn purchasing inventories into cash sales.

Working capital was much higher for Ford at 86,918,000 verses GM at 15,469,000.

Current Ratio - Current ratio reveals to an investor the company’s ability to pay back its short

term liabilities with its short term assets. The higher the current ratio, the more capable a

company pays off its obligations. GMs’ current ratio was 1.28 compared to Ford’s 2.59. The

standard benchmark equals to 2. Ford falls within the range limit.

Cash Ratio and Acid Test Ratio - Acid test ratio for GM is 1.01 and 2.46 for Ford. This ratio

reflects the fact that Ford has enough short term assets to address their current liabilities without

having to sell any inventory. Cash ratio can tell an investor how fast a company can repay its

short-term debt. GM has a cash ratio of 0.54 while Ford has 0.66 as the cash ratio. Ford has a

higher cash ratio meaning it can pay off its short-term debt faster than GM.
Financial Analysis: General Motors and The Ford Company

Long-Term Debt Paying Ability Ratios

These ratios focus on the company’s loans and financial obligations that last longer than a year.

When a company borrows money, they must pay the principal amount back including any

interest accrued on the debt.

Figure 3 Times Interest GM and Ford

Times Interest Earned Ratio - Times interest earned ratio, Figure 3 (above), measures the

company’s ability to honor its debt payments. The average times interest ratio for GM was

negative 10.29 times per year and for Ford it was positive 4.58 times per year. When comparing

the two companies, Ford has clearly higher times interest earned ratio compared to GM. This

represents Ford’s stable interest paying ability.

Financial Analysis: General Motors and The Ford Company

Figure 4 Debt Ratios for GM and Ford

Debt Ratio - Debt ratio represents whether a company has sufficient funds to pay its debt and

represents their long-term debt paying ability, the lower the better. Shown in figure 4 (above),

GMs’ debt ratio percentage was 74.29% versus Ford’s at 90.01%.

Debt to Equity Ratio - This ratio compares the total debt with the total shareholder’s equity. The

debt/equity ratio also helps determine how well creditors are protected in the case of insolvency.

The company’s debt position is better if the ratio is low. GMs’ average debt to equity ratio was

289%, while Ford’s was 944%. If comparing the two companies, GM has the better debt

position.

Profitability Ratios

Profitability ratios show a company’s overall performance and efficiency. Profitability ratios are

divided into two parts: returns and margins. Returns represent the firm’s ability to measure the

overall efficiency to generate returns for its stockholders. Margins represent the firm’s ability to

translate sales dollars into profits.

Financial Analysis: General Motors and The Ford Company

Net Profit - Net profit margin measures how much a company actually keeps in earnings out of

every dollar of sales. The net profit margin for GM is 3.11% in comparison with Ford at 7.46%.

Higher profit margin reveals when a company was more profitable and that it has better control

over its total costs.

Total Asset Turnover, Operating Asset Turnover, and Sales to Fixed Assets - Total asset

turnover, operating asset turnover, and sales to fixed assets examine a company’s assets and

revenues similar relationship. It suggests whether a firm was using their assets to generate

revenue. The total asset turnover ratio gave an idea to investors of how much revenue the

company was generating from each dollar’s worth of assets. The total asset turnover ratio for

GM was 1.08 times a year in comparison with 0.76 times for Ford.

Return On Assets and Return On Operating Assets - These ratios indicate a similar relationship

between assets and profits of a company. And how much operating income is produced from the

use of operating assets. The return on operating assets for GM was 3.78% and that of Ford was

6.17%. Ford’s reported ratio shows how much more efficient they are when using its operating

assets to generate operating income.

Return On Investment - Return on investment was the level of returns to a long term creditor and

stockholder of the company. The higher the returns on investment for a company, the more

attractive it is to the investors. GM’s average return on investment was 6.54% and Fords of

9.19%.
Financial Analysis: General Motors and The Ford Company

Return On Total Equity and Returns on common equity - Return on total equity and returns on

common equity is the net income generated as a percentage of shareholder’s equity. In GMs’,

returns to total equity was reported as 10.52% in comparison with Ford at 116.83%. It is not

attractive for common stockholders to invest in GM since its returns on common equity so low

verse Ford’s percentage at 116.83%.

Investor Analysis

Degree of Financial Leverage - The degree of financial leverage ratio measures the sensitivity of

a company’s earnings per share to fluctuations in its operating income. The higher degree of

financial leverage, the more unstable the earnings per share for the company. The average

financial leverage for both GM and Ford were similar, 1.05 to 1.07 times.

Earnings per Share - The earnings per share ratio are the company’s current share price compare

to it’s per share-earnings. On average, investors are willing to pay $3.58 for every dollar earned

by GM and $2.88 for every dollar earned at Ford.

Percentage of Earnings Retained, Dividend Payout, Dividend Yield, Book Value - GM averaged

at 71.68%, while Ford averaged at 88.87% of percentage of earnings retained. Percentage of

earnings retained is the net earnings not paid out as dividend but instead reserved by the

company. It is then reinvested within the company’s core business or used to pay off debt.

Regarding dividend payout, 0% of GM’s net income was distributed as dividends, while 11.50%

was paid out by Ford. When we look at the average book value per share, GMs’ book value

averaged at $20.98 versus Ford’s book value average at $4.87.

Financial Analysis: General Motors and The Ford Company

Cash Flow Ratios

Cash flow ratios indicates the level of cash being generated from sales, being invested and

generated in fixed assets, and/or used to cover the obligations for the company. Operating cash

flow, current maturity of long term debt, and current notes payable specify to an investor

whether the company has enough cash to meet its current maturities of debt. Operating cash flow

per share tells an investor how much cash is available for common shares outstanding. The

higher the ratio, the better is the ability of a company to pay to its common shares outstanding.

Ford’s operating cash flow per share was $5.36 compared to Ford’s at $2.40. Finally, operating

cash flow per cash dividend indicates the firm’s ability to cover cash dividends with operating

cash flow. The operating cash flow per cash dividend for GM was reported as 0.00 whereas

23.96 for Ford.

Financial Analysis: General Motors and The Ford Company May 2015

Conclusion

After completing the financial analysis between GM and Ford, we have concluded that Ford is

the better company to invest in.  Ford’s ratio results for liquidity, long term debt paying ability,

profitability, investor analysis, and cash flow were superior when compared to GM. In liquidity,

Ford ‘s result for days’ in inventory and acid test were significantly better than GM. Ford also

ranked significantly better compared to GM in almost all of the long term debt paying ability

ratios. Most of the various profitability ratios, Ford has the better performance as compared with

GM. Ford’s dividend payout, dividend yield, and percentage of earnings retained were

substantially higher than GM since GM did not payout in dividends. And lastly, Ford’s also had

the better operating cash flow.

References

"Company." Ford Corporate. Ford Company, 2015. Web. 03 May 2015.

Investopedia. Investopedia, LLC., 2015. Web. 25 Apr. 2015.
"Ford Motor Company." Wikipedia. Wikimedia Foundation, 03 May 2015. Web. 25 Apr. 2015.
"General Motors | About Our Company." General Motors | About Our Company. General
Motors, 2015. Web. 25 Apr. 2015.
"General Motors." Wikipedia. Wikimedia Foundation, 03 May 2015. Web. 25 Apr. 2015.
 
FINANCIAL ANALYSIS: FORD MOTORS & GENERAL MOTORS

Appendix A: Balance Sheet Ford & GM

Balance Sheet for General Motors

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Balance Sheet for Ford Motors

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Appendix B: Income Statement Ford & GM

Income Statement for General Motors

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Income Statement for Ford

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Appendix D: Vertical Analysis Ford & GM

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Appendix E: Horizontal Analysis Ford & GM

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Appendix G: Ford Motors Ratios

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G (contd.): General Motors Ratios

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Appendix H: Projected Balance Sheet and Income Statement

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