ACCA registration number: 2744661

Mentor name: Tahir Sartaj

Word Count: 7500
Topic 8: An analysis and evaluation of business and financial performance of Ford Motor
Company over a three-year period
Contents
Part 1: Research objectives and overall research approach........................................................................3
Reasons for choosing Topic 8..................................................................................................................3
Reasons for choosing Ford Motor Company...........................................................................................3
Company and Industry Analysis...............................................................................................................3
About Ford...........................................................................................................................................3
About the industry...............................................................................................................................3
Market Share (sales wise)........................................................................................................................5
Research Report Objectives.....................................................................................................................5
Research Report Framework...................................................................................................................6
Part 2: Information gathering and accounting/business techniques...........................................................7
Information..............................................................................................................................................7
Sources of information used for the research report..............................................................................7
Annual reports.........................................................................................................................................7
Company website....................................................................................................................................7
Other websites and articles.....................................................................................................................8
Accounting and business techniques.......................................................................................................8
Financial analysis.....................................................................................................................................8
Trend analysis......................................................................................................................................8
Ratio analysis.......................................................................................................................................8
Business analysis.....................................................................................................................................9
SWOT analysis.....................................................................................................................................9
PEST analysis........................................................................................................................................9
Ethical considerations............................................................................................................................10
Part 3: Analysis, conclusion and recommendations..................................................................................11
Financial analysis...................................................................................................................................11
Trend analysis....................................................................................................................................11
Ratio analysis.....................................................................................................................................16
Business analysis...................................................................................................................................30
SWOT analysis of Ford:......................................................................................................................30
PEST analysis of Ford.........................................................................................................................32
Conclusion.............................................................................................................................................34
Recommendations.................................................................................................................................34
Part 1: Research objectives and overall research approach
Reasons for choosing Topic 8
My career goal is to work in asset management which is where investment analysis skills are
needed. This topic gives me first-hand opportunity to get a feel of what investment analysts do
in their jobs to make investment decisions. Moreover, this topic gives me an opportunity to apply
the skills and knowledge I have accumulated during my ACCA studies, which will further
strengthen my analytical ability and interpretation skills.

Reasons for choosing Ford Motor Company

I grew a fondness of Ford after reading about how they revolutionized the auto industry by
setting up first assembly line for mass-production of Model T in 1908 and the resiliency they
showed by recovering from 2007/08 economic crisis without a government bailout (Wharton
Business Daily, 2018). Therefore, I was curious and wanted to find out more about current
performance of the company.

Company and Industry Analysis

About Ford
Ford Motor Company was founded in 1903 by Henry Ford and 11 other investors, which was
later reincorporated in 1919 and Henry Ford’s immediate family, their heirs and the Ford
Foundation were sole shareholders until 1956 (Britannica, 1998). Currently, William Clay Ford Jr
owns the highest shareholding with 6.8 million shares (MotorsandWheels, 2020).

It is listed on NYSE (MarketWatch, 2021) and the company operates in three segments, namely
Automotive, Ford Credit and Mobility, which focuses on development of autonomous driving
systems (Reuters, 2021). Its vehicle offerings range from compacts, sedans to crossovers,
SUVs and trucks (Ford, 2021). Ford trucks are extremely popular in United States, which is
demonstrated by Ford selling nearly 900,000 F-series trucks in 2019 alone (Detroit Free Press,
2020).

About the industry

US automotive industry is one of the largest automotive industries in the world, with sales of
almost 17 million light vehicles in 2019, largely driven by light truck vehicles sales (Statista,
2021). General Motors has the largest market share in the United States, with 17% of the
industry’s total sales as of early 2019, followed by Ford at 14% (Statista, 2021).
Ford’s US sales declined by 3.2% in 2019 compared to the 1.6% fall in total sales of vehicles in
US, which reflects a declining demand in the US auto market, resulting in aging inventory and
steeper discounts offered to unload the older models, and consequently, Ford is considering to
shift its US lineup to almost exclusively SUVs/trucks and to tackle rising demand for electric
vehicles with introduction of all-electric Mustang Mach E (Wall Street Journal, 2020).

Total Sales (all inclusive)

180000
156776 160388 155900
160000
145588 147049
137237
140000
Sales (USD Millions)

120000

100000

80000

60000

40000
21461 24578
20000 11759

0
2017 2018 2019

Ford Motor Company General Motors Tesla Inc

(Figure 1)
(General Motors, SEC Annual Filings 2020/2019/2018, p.47/47/46)
(Ford Motor Company, Annual Report 2019/2018/2017, p.FS-6/FS-3/FS-3)
(Wall Street Journal, Tesla Inc Financials, 2021)

Ford’s total sales grew by 2.3% in 2018 as compared to 1% growth in total sales of General
Motors and 82.5% growth for Tesla. Ford derived 7.09% of its total revenue from Ford Credit
and Mobility in 2017, 7.5% in 2018 and 7.8% in 2019 (Ford Motor Company, Annual Report
2019/2018/2017, p.FS-6/FS-3/FS-3), while General Motors derived 8.3% of total revenue from
GM Financial in 2017, 9.5% in 2018 and 10.5% in 2019 (General Motors, SEC Annual Filings
2020/2019/2018, p.47/47/46).

Market Share (sales wise)

 2017 2018 2019
3.74% 6.53% 7.74%

49.91 48.77 49.07

% % %
46.35
% 44.71 43.20
% %

Ford Motor Company Ford Motor Company Ford Motor Company

General Motors General Motors General Motors
Tesla Inc Tesla Inc Tesla Inc

(Annexure 1)
(Figure 2)
(General Motors, SEC Annual Filings 2020/2019/2018, p.47/47/46)
(Ford Motor Company, Annual Report 2019/2018/2017, p.FS-6/FS-3/FS-3)
(Wall Street Journal, Tesla Inc Financials, 2021)

Ford’s market shareholding of 49.9% in 2017 declined by more than 1% in 2018 in proportion to
the total revenue of the three companies. However, it recovered marginally by 0.30% in 2019.
General Motors market share has declined consistently since 2017. Furthermore, it is interesting
to see Tesla posting greater revenues year over year and this is partly driven by growing but
cautious interest in electric vehicles (CNBC, 2019).

Research Report Objectives

 Analysis of financial performance of Ford for financial year 2017, 2018 and 2019 using
trend and ratio analysis.
 Compare its performance with that of General Motors over the same period.
 Perform business analysis of Ford using SWOT and PEST analysis.
 Conclude and provide recommendations based on the analysis performed.
Research Report Framework
The Part 1 of the research report contains information about Ford, its industry and expands on
why this particular topic and company were chosen. It goes on to analyze the total sales and
market shares of the three companies. Finally, it sets the objectives for the research report.

Part 2 contains information about the sources used, including the business and financial tools
used along with their limitations.

Part 3 is all about financial analysis of Ford and its competitor General Motors. It also contains
business analysis of Ford before concluding and providing recommendations.

Part 2: Information gathering and accounting/business techniques

Information
Information means knowledge gained through study, communication, research, instructions, et
cetera, for example factual data (Dictionary.com, 2021).

Sources of information used for the research report

 Annual reports
 Company’s website
 Other websites and articles

Annual reports
A listed company must file annual reports with relevant authority, such as Securities and
Exchange Commission in the United States (SEC, 2018). They contain information about the
company’s financial position, performance and management commentary which presents
management’s views about the company’s position and performance, and their strategic goals.

The following factors should be considered when doing analysis using only annual reports:

 They are made by the management who may be subject to bias when preparing them
(Harvard Business Review, 2016)
 The auditor has to adopt sample approach during audit due to financial or time
constraints which means that there still remains detection risk (ACCA, 2009)

Company website
A company’s website contains information about the types of services they provide or products
they manufacture. It also contains mission and vision statements and news about recent
developments.

However, the website may not be regularly maintained and updated. As with annual reports,
they may contain biased information prepared by the management. Lastly, they do not contain
all information needed to do analysis of appropriate depth.

Other websites and articles

Any search on Google leads to variety of sources, which are very useful as they provide an
unbiased view of the company. However, this has some drawbacks. Search engines may
inadvertently spread disinformation due to inadequate moderation of search results the end-
user gets (The New York Times, 2018). Search engines may also lead to results with incoherent
information which needs to be organized during research. Other websites may also contain
plagiarized information.

Independent articles available on business publications that cover the automotive industry are
used during course of this research. The drawbacks are authors may still be subject to
confirmatory bias and the articles may contain incorrect or outdated information to validate their
opinions.

Accounting and business techniques

This research report revolves around two important aspects: financial and business
performance analysis and evaluation of Ford Motor Company. Financial performance analysis
includes analysis and interpretation of financial statements in a way that includes full diagnosis
of the financial soundness of the business (Simplilearn, 2020). Business analysis can be done
using SWOT analysis (Business News Daily, 2019) and PEST analysis (Business News Daily,
2018).

Financial analysis
Trend analysis
Trend analysis means looking at how a potential driver of change has developed over time
(OECD, 2021). In context of financial statements, this technique involves the collection of
variables, such as revenue, from multiple time periods for interpretation (AccountingTools,
2020).

Limitation of trend analysis is that it is based on past performance and if forecasts are based on
past performance, it may not be reliable in highly dynamic business environment (Bizfluent,
2017).

Ratio analysis
Financial ratios are created with the use of numerical values taken from financial statements to
gain meaningful information about a company (Corporate Finance Institute, 2021). It includes:

Profitability ratios: Operating profit margin, net profit margin, return on capital employed,
where this is long-term debt and equity, the first two ratios calculate the profitability in a given
period and the third calculates how much of that profit is generated by the capital employed
(Corporate Finance Institute, 2021).
Liquidity ratio: Includes current ratio which measures a company’s ability to pay off its short-
term obligations using current assets (Corporate Finance Institute, 2021).

Gearing ratios: First is normally calculated as debt over debt plus equity, showing how much
debt is employed in capital structure, while second is interest cover, calculated as earnings
before interest and tax divided by interest, which shows how many times interest can be
covered with operating earnings (Corporate Finance Institute, 2021).

Investors’ ratio: Includes earnings per share, calculated as profit after tax and preferred
dividends over weighted average number of shares (Corporate Finance Institute, 2021).

Business analysis
Business analysis is the discipline of acknowledging business needs and finding solutions to
various business problems (PESTLEanalysis, 2015). While business analysis can be done
using different models, two key models will be used here: SWOT analysis (Business News
Daily, 2019) and PEST analysis (Business News Daily, 2018).

SWOT analysis
A SWOT analysis is a compilation of a company's strengths, weaknesses, opportunities and
threats, primary objective of a SWOT analysis being to help organizations develop a full
awareness of all the factors involved in making a business decision (Business News Daily,
2019)

SWOT analysis should be used with care. First, more research and data may be needed for
adequate business planning; second, a lack of hierarchy can lead to problems, for example
SWOT analysis does not tell us which issues to prioritize first (PESTLEanalysis, 2018)

PEST analysis
PEST stands for political, economic, social, technological; and is a management tool whereby
the macro-environment that influences the operations of a company can be assessed (Business
News Daily, 2018).

The factors are:

1. Political: This involves political factors that affect a company, such as fiscal policy, any
particular legislation regarding limitation on imports/exports and barriers to entry
(Business News Daily, 2018).
 2. Economic: The economic portion of the analysis involves factors such as interest rates,
foreign exchange rates, supply and demand, inflation and recession (Business News
Daily, 2018).
3. Social: Involves factors such as demographics, age distribution, cultural values,
attitudes and workplace and lifestyle trends (Business News Daily, 2018).
4. Technological: This considers the specific role of technologies within the sector and
organization, as well as the uses, trends, and changes in technology (Business News
Daily, 2018).

PEST should be used with care. First, this can lead to “paralysis by analysis” as not all factors
will be always considered (CIPD, 2020). Moreover, the speed of change makes it increasingly
difficult to predict developments that may impact an organization in the future (CIPD, 2020).

Ethical considerations
This research report is meant for academic purposes only and to be submitted as part of OBU
degree requirement. All information gathered is accurate and effort has been made to avoid any
kind of plagiarism. Where work of others is used, proper references are made. The results are
objectively analyzed to ensure provision of unbiased recommendations.

Part 3: Analysis, conclusion and recommendations

Financial analysis
Trend analysis
Ford Motor Company total sales

Total sales
165,000
2.2% -2.76%
160,000 26
Sales (USD millions)

10 41
155,000 12,018
11,113
150,000 12,260

145,000
148,294
140,000 145,653
143,599

135,000
2017 2018 2019

Ford Motor Company

Automotive Ford Credit Mobility

(Annexure 2)
(Figure 3)
(Ford Motor Company, Annual Report 2019/2018/2017, p.FS-18/FS-16/FS-16)

How Ford makes money

From figure 3, Ford’s major revenue segment is Automotive with revenue of $145.7 billion in
2017 (The Detroit News, 2018). Automotive segment consists of vehicles, parts and
accessories, used vehicles sold at auctions or through consolidated dealerships, extended
service contracts, net commissions from selling products and vehicles for third parties, and
leasing income from operating leases with rental companies (Ford Motor Company, Annual
Report 2017, p.FS-16).

Ford Credit derives revenue from leases offered via dealerships and upon purchase of a lease,
Ford Credit takes ownership of the vehicle and recognizes an operating lease (Ford Motor
Company, Annual Report 2017, p.FS-18), meaning ownership rights are not conveyed
(AccountingTools, 2021). They also derive income from financing and insurance contracts (Ford
Motor Company, Annual Report 2017, p.FS-18).
Ford Mobility segment is the company’s research and development for self-driving cars and
Ford receives payments for designing and testing vehicles for third parties, and they have
applied the practical expedient to recognize revenue for this segment related to vehicle design
and testing over the two and three year term of these agreements (Ford Motor Company,
Annual Report 2017, p.FS-17).

Sales trend
2017 stayed fairly consistent in terms of sales growth as they achieved a growth of 3.2%
compared to total sales of 2016 (Ford Motor Company, Annual Report 2017, p.FS-3). The
growth in revenue was backed by higher wholesale volume, which was assisted by 9.3% sales
growth of F-series trucks, marking 8th year in a row of Ford being the best-selling auto brand in
the US (Dbusiness, 2018)

2018 saw a further growth of 2.2% in total sales. This was unexpected as it was lower by 1%
than 2017. The lower growth rate in total sales was driven by the company’s poor performance
in Chinese and European markets but Ford’s CEO Jim Hackett reiterated that North America
was the foundation of the business and despite suffering headwinds, it remained fairly
consistent with expectations (The Detroit News,2019).

Ford’s total sales declined by 2.76% in 2019. Its US sales also declined by 3.2% (Wall Street
Journal, 2020). This decline was mainly driven by the flubbed launch of an all-new best-selling
SUV Explorer, leading to its sales going down by 5% (The Detroit News, 2020). According to
Ford’s CFO Tim Stone, operational inefficiencies such as the rush to production led to months-
long delays caused 26% fewer Explorers delivered in 2019 (The Detroit News, 2020)

General Motors total sales

-6.67%
1%
 Total sales
150,000

145,000

140,000 14,004
Sales (USD millions)

12,139
135,000

130,000 14,540
125,000
133,449 133,045
120,000
122,697
115,000

110,000
2017 2018 2019

General Motors

Automotive GM Financial

(Annexure 2)
(Figure 4)
(General Motors, SEC Annual Filings 2020/2019/2018, p.47/47/46)

How GM makes money

GM owns several brands such as GMC, Chevrolet, Buick, Cadillac and Holden brands (Forbes,
2019), which all design, build and sell cars, trucks, crossovers and automobile parts worldwide
(General Motors, SEC Annual Filings 2018, p.50). From figure 4, GM’s major segment has been
Automotive.

GM Financial mainly earns revenue by offering financing services such as operating leases
(General Motors, SEC Annual Filings 2018, p.50).

Sales trend
During 2017, GM sold Opel AG as it was incurring losses but with that, it also lost the ability the
sell vehicles in Europe compared to 1.2 million vehicle sales in 2016, leading to decline in sales
(The Motley Fool, 2017)

2018 saw an increase of 1% in revenue which was fueled by better prices for vehicles sold in
North America, its most lucrative market, despite of fall in US sales by 1.6% as sales of big
SUVs and Chevrolet’s top-selling truck Silverado declined during the fourth quarter (Phys.org,
2019).

Revenue during the financial year 2019 declined by a whopping 6.67% which was largely driven
by slumping sales in US and Chinese markets and the 40-day strike by United Auto Workers in
the last quarter, which cost the company $2.6 billion and sales of 191,000 vehicles thereby
paralyzing the US factories (Business Insider, 2020).

Ford Motor Company and General Motors sales comparison

Total Sales Comparison

165,000
160,338
160,000
156,776 155,900
155,000
Sales (USD millions)

150,000
147,049
145,588
145,000

140,000 137,237
135,000

130,000

125,000
2017 2018 2019

Ford Motor Company General Motors

(Figure 5)
(General Motors, SEC Annual Filings 2020/2019/2018, p.47/47/46)
(Ford Motor Company, Annual Report 2019/2018/2017, p.FS-6/FS-3/FS-3)

Ford has so far been able to capture only 14% share of US auto market compared to 17% of
GM (Statista, 2021). This is mostly because Ford’s former CEO Alan Mulally focused much of
the company’s resources on expensive redesign of the best-selling F-series trucks, including
making an expensive shift from steel to aluminum to make them lighter and fuel efficient,
thereby safeguarding lead in that segment but it prevented Ford from investing in research and
development in other areas (Reuters, 2017). Moreover, as Ford did not seek bankruptcy,
leaving it short on cash for development (Reuters, 2017). Also, GM led the field in the
development of autonomous and electric vehicles while Ford seemed to be lacking in its
competition, which is one of the reasons why GM has outperformed Ford (Market Realist,
2018).

In 2018, Ford’s sales grew by 2.2% while GM were able to achieve only 1%. This disparity in
growth rates was mainly because Ford finished 2018 in Europe with 8.1% increase in
commercial vehicles delivered, gaining 0.6% on its 14.1% market share of commercial vehicles,
9.3% growth in SUV sales and Ford Ranger “notched another year as the best-selling pickup
truck in Europe” (The News Wheel, 2019) while GM had lost the sales in European market with
sale of its Opel brand (The Motley Fool, 2017). Also, GM’s US sales fell 2.7% in December as
sales of its new pickups weren't strong enough to overcome big declines in sales of its sedans
(The Motley Fool, 2019).

2019 was another bad year for GM as its revenue declined by 6.67% compared to Ford decline
in sales of 2.76%. This was directly driven by workers strike at GM (Business Insider, 2020) and
a generally declining automotive industry (Financial Times, 2019).
Ratio analysis
Profitability ratios
Operating profit margin (OPM):

OPM Comparison
8.00%
6.88%
7.00%

6.00%

5.00%
Margin %

3.99%
4.00%
3.07% 3.02%
3.00%
2.00%
2.00%

1.00%
0.37%
0.00%
2017 2018 2019

Ford Motor Company General Motors

(Annexure 3)
(Figure 6)
(General Motors, SEC Annual Filings 2020/2019/2018, p.47/47/46)
(Ford Motor Company, Annual Report 2019/2018/2017, p.FS-6/FS-3/FS-3)

Ford:
Ford’s OPM in 2017 of 3.07% was poor compared to GM. This was mainly driven by rising
commodity prices, such as steel and aluminum, unfavorable foreign exchange rates and
payment of $7500 profit-sharing bonuses to approximately 57,000 unionized US workers (The
Wall Street Journal, 2018). The costs of sales, selling, administrative and other expenses were
$142.9 billion in 2017, an increase of $5.7 billion compared with 2016 of which, 21% was
attributable to rise in commodity prices (Ford Motor Company, Annual Report 2017, p.30). Also,
adverse foreign exchange rates reflected Brexit effects of about $600 million (Ford Motor
Company, Annual Report 2017, p.34).
Ford’s OPM fell by almost 1% in 2018 (Figure 6). The North America segment of Ford
performed well, demonstrated by operating profit going up by more than 4%, largely because of
improvements in the mix of products it sold, more SUVs and trucks relative to cars, and the net
pricing were enough to offset the higher commodity costs and spending of recalls related to the
Takata airbag recall (The Motley Fool, 2019). However, North America suffered headwinds of
about $750 million in tariff-related effects, $2.2 billion in increased commodity cost unrelated to
tariffs, $750 million of unfavorable exchange net of pricing and $775 million of cost related to
Takata recalls announced last year (Ford Motor Company, Annual Report 2018, p.35). In South
America and Europe, Ford was able to achieve net pricing gains, however, they were more than
offset by adverse exchange movements and higher costs in Europe, including costs related to
launch of the new Ford Focus in Europe (The Motley Fool, 2019)

In 2019, Ford’s OPM fell to 0.37% (Figure 6), which is almost negligible. This was driven by
fourth-quarter adjusted operating income which fell by 67% from 2018, to $485 million, on
account of higher costs related to a new labor agreement and new product launches (The
Motley Fool, 2020). In North America, Ford earned EBIT of $700 million in the fourth quarter,
down from about $2 billion in 2018. The decline was fueled by an 8% drop in wholesale
shipments and inflated costs, both related to an ongoing product-line overhaul, and contract-
related bonuses for workers represented by the United Auto Workers, and ongoing restructuring
in Europe, China and South America cost Ford additional $400 million (The Motley Fool, 2020).

General Motors:
In 2017, the OPM remained healthy at 6.88% (Figure 6) which was driven by implementation of
a cost cutting and higher pricing strategy which offset the declining demand in US auto industry
(Reuters, 2018). This is shown in the consolidated income statement for 2017 where automotive
selling, general and administrative expenses were successfully cut by 7.5% (General Motors,
SEC Annual Filing 2018, p.46). Additionally, the automaker paid $11,750 profit-sharing bonus to
50,000 hourly workers of United Auto Workers union (Reuters, 2018).

During 2018, GM witnessed a sharp decline in its OPM by almost 4% (Figure 6). This was partly
a result of the restructuring which ended up costing GM $1.3 billion (CNBC, 2019). Also, GM
took a took hit worth $1 billion from rising costs related to commodities (The Detroit News,
2019).

In 2019, despite of the slumping sales in US and Chinese markets and the 40-day strike by
factory workers which paralyzed US factories and cost pre-tax earnings of $1.39 per share
(Manufacturing.net, 2020), GM’s OPM improved by almost 1% (Figure 6). This was largely due
to cost cutting strategy as a result of a generally declining auto industry (Financial Times, 2019),
which is shown by cutting profit-sharing bonus to $8000 from $10,750 a year ago
(Manufacturing.net, 2020).
Net profit margin (NPM):

NPM Comparison
6.00% 5.44%
4.87% 4.86%
5.00%

4.00%

3.00%
2.30%
2.00%
Margin %

1.00%
0.05%
0.00%
2017 2018 2019
-1.00%
-2.00%
-2.67%
-3.00%

-4.00%

Ford Motor Company General Motors

(Annexure 4)
(Figure 7)
(General Motors, SEC Annual Filings 2020/2019/2018, p.47/47/46)
(Ford Motor Company, Annual Report 2019/2018/2017, p.FS-6/FS-3/FS-3)

Ford:
In 2017, the NPM was 4.87% which was better by 2% than in 2016 (Ford Motor Company,
Annual Report 2017, p.FS-3). Its net income rose by 65%, a $3 billion improvement, pensions
and taxes being the main contributors (The Motley Fool, 2018). Ford's pension-related
remeasurements went from a $3 billion negative in 2016 to a gain of about $192 million in 2017,
and due to new US tax laws and Ford’s campaign to realize tax credits, Ford’s effective
adjusted income tax rate fell to 15.3% in 2017 (The Motley Fool, 2018).

In 2018, Ford’s NPM declined by 2.57% as shown by figure 7. The reason for this decline was
Ford’s woes in China, that is its equity income from its joint operations with automakers in China
turned from a $916 million profit in 2017 to a $110 million loss in 2018, a decline of over $1
billion and 112% (The Motley Fool, 2019).
The NPM in 2019 was 0.05% which is almost negligible. While the investment related interest
income increased by 21.2%, Ford suffered a major loss of $1.6 billion on net periodic pension
and OPEB plan (Ford Motor Company, Annual Report 2019, p.FS-20). Furthermore, the equity
in net income of affiliated companies, mainly Chinese joint operations, declined by a further 74%
(Ford Motor Company, Annual Report 2019, p.FS-6).

General Motors:
GM reported a negative NPM of -2.67% in 2017 (Figure 7). The reason behind this was GM
exited Europe during the year by selling their failing business to PSA Group (General Motors,
SEC Annual Filing 2018, p.58), suffering a loss from discontinued operations of $3.882 billion
(General Motors, SEC Annual Filing 2018, p.46), in addition to the staggering increase in US
federal tax (General Motors, SEC Annual Filing 2018, p.77).

2018 was memorable for GM as their NPM rebounded to 5.44% (Figure 7). This was mainly
because, even though earnings remained more or less the same as 2017, the 2018 income
statement did not include the one-time non-cash charge from the remeasurement of deferred
tax assets because of recent tax reform (IndustryWeek, 2018) (General Motors, SEC Annual
Filing 2019, p.47).

NPM for 2019 declined to 4.86% (Figure 7). During the year, the automotive revenue declined
by more than 7%, which was largely caused by the United Auto Workers union 40-day strike
(AP News, 2020). Moreover, the equity income also declined in the period by 41%, mainly
driven by the loss-making Chinese joint operations (General Motors, SEC Annual Filing 2020,
p.63-64).

Return on capital employed:

 ROCE Comparison
8.00%
7.39%
7.00%

6.00%

5.00%
percentage %

4.00% 3.83%

2.95% 3.06%
3.00%
1.99%
2.00%

1.00%
0.36%
0.00%
2017 2018 2019

Ford Motor Company General Motors

(Annexure 5)
(Figure 8)
(General Motors, SEC Annual Filings 2020/2019/2018, p.47-48/47-48/46-47)
(Ford Motor Company, Annual Report 2019/2018/2017, p.FS-6-7/FS-3-4/FS-3-4)

Ford:
As can be seen on figure 6, Ford’s OPM in 2017 was 3.07%, affected mostly by rising prices of
commodities (The Wall Street Journal, 2018). This lower OPM in turn pushed ROCE to a low
level of 2.95% as can be seen on figure 8. The asset backed debt from financial services used
to support operations and liquidity, which mainly consists of Ford Credit segment, also went up
by 12.5% which also contributed to lower ROCE (Ford Motor Company, Annual Report 2017,
p.FS-53). In the second quarter of 2017, Ford completed a modest anti-dilutive share buyback
program, which had an offsetting effect on share-based compensation granted during the year,
consisting of 11.8 million common stock thereby saving ROCE from further decline (Ford Motor
Company, Annual Report 2017, p.23).

In 2018, the ROCE declined by almost 1% (Figure 8). The liabilities and equity remained more
or less the same, with the exception of further treasury stock of $164 million (Ford Motor
Company, Annual Report 2018, p.FS-4). Moreover, the major reason for decline in ROCE was
rise in operating costs including those incurred as a result of poor operational efficiency and
higher warranty costs which topped 3% per quarter as compared to 2% previously (Reuters,
2020).

In 2019, the operating costs remained somewhat constant, however there was 2.76% decline in
sales (Ford Motor Company, Annual Report 2019, p.FS-6), leading to more than 2% decline in
ROCE, for which flubbed launch of the Explorer was main contributor (The Detroit News, 2020).
This decline in sales was too much to be offset by additional $196 million treasury stock (Ford
Motor Company, Annual Report 2019, p.FS-7).

General Motors:
2017 was a good year for GM as they were able to achieve ROCE of 7.39% (Figure 8). This
was mostly because GM implemented a cost cutting and high pricing strategy which resulted in
higher operating income (Reuters, 2018). In addition to this, as GM existed Europe by selling
Opel (The Motley Fool, 2017), they made a net loss on the sale which reduced the retained
earnings during the period (General Motors, SEC Annual Filings 2018, p.49), which in turn had
favorable effect on ROCE.

ROCE declined to 3.06% during 2018. Despite of the cost cutting and higher pricing strategy,
GM suffered several headwinds such as rising prices of commodities (The Detroit News, 2019)
which affected operating profit. Moreover, as a result of adoption of ASU 2014-09 accounting
standards and retrospective application, GM suffered an accounting loss of over $1 billion
during the period which was charged to retained earnings (General Motors, SEC Annual Filings
2019, p.50/58). Any favorable effect of this was more than offset by charge of net income to
retained earnings of over $8 billion (General Motors, SEC Annual Filings 2019, p.50).

During 2019, ROCE recovered by almost 1%. This was because the long-term debt from
variable interest entities of GM Financial went down by $6.5 billion (General Motors, SEC
Annual Filings 2020, p.48) and as result of better sales mix and good cost control, operating
profit improved compared to 2018 (GM Corporate Newsroom, 2020) (Reuters, 2018).
Liquidity ratio
Current ratio:

timesx Current Ratio Comparison

0.88
2019
1.16

0.92
2018
1.20

0.89
2017
1.23

0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40

General Motors Ford Motor Company

(Annexure 6)
(Figure 9)
(General Motors, SEC Annual Filings 2020/2019/2018, p.48/48/47)
(Ford Motor Company, Annual Report 2019/2018/2017, p.FS-7/FS-4/FS-4)

Ford:
Ford’s current ratio remained healthy at 1.23x in 2017, indicating an overall better management
of working capital (Figure 9). However, this has to be considered with caution. Ford’s increase in
inventories of over 15% is cause for concern (Ford Motor Company, Annual Report 2017, p.FS-
4) since auto industry is contracting, leading to build-up of inventory (The Chicago Tribune,
2017).

Ford’s current ratio remained almost the same in 2018 at 1.20x. The current assets decreased
by 1.8% while the current liabilities rose by 1%, thereby marginally pulling down the current ratio
(Ford Motor Company, Annual Report 2018, p.FS-4). Most of this increase came from Ford
Credit’s debt repayable within one year, consisting mainly of asset-backed and other unsecured
debt (Ford Motor Company, Annual Report 2018, p.FS-46).
Current ratio of Ford further declined to 1.16x in 2019. This was directly driven by 2.68%
increase in current liabilities while the short-term assets decreased by 0.5%, resulting in a
disparity between the two and pulling down current ratio (Ford Motor Company, Annual Report
2019, p.FS-7). The main contributor to increase in short-term liabilities was other liabilities and
deferred revenue which increased by 8.4% and includes dealer and dealer’s customer
allowances and claims and employee benefits payable in one year (Ford Motor Company,
Annual Report 2019, p.FS-40).

General Motors:
GM’s current ratio of 0.89x in 2017 was beyond abysmal. While the current liabilities reduced by
almost 10% from 2016, the current assets also reduced by 10% thereby offsetting any favorable
effect the reduction of current liabilities would have on current ratio (General Motors, SEC
Annual Filings 2018, p.47). Most of this decrease in current assets was attributable to decrease
in fair value of its investment in marketable securities belonging to US government and its
agencies (General Motors, SEC Annual Filings 2018, p.60).

GM’s current ratio slightly improved to 0.92x in 2018. Current assets increased during the year
by 9.5% but this increase was almost offset by increase of 7% in current liabilities which limited
the growth in current ratio to only 0.03x (General Motors, SEC Annual Filings 2019, p.48). Most
of the increase in current liabilities was driven by current portion of the debt the financial
services segment of GM issues using its variable interest entities (General Motors, SEC Annual
Filings 2019, p.68).

The current ratio of GM declined to 0.88x during 2019. This decline was again fueled by the
staggering 14.6% increase in GM Financial’s current portion of debt (General Motors, SEC
Annual Filings 2020, p.48) issued via special purpose entities, indicating that greater portion of
their long-term debt was becoming current and needed scrambling of resources (General
Motors, SEC Annual Filings 2020, p.67).
Gearing ratios
Debt over debt plus equity:

Total Debt in Capital Structure Comparison

82.00%
80.00% 79.28%
78.59%
78.00% 77.64%

76.00%

74.00% 73.30%
Percentage %

72.00%
70.52%
70.00%
67.89%
68.00%
66.00%

64.00%
62.00%
2017 2018 2019

Ford Motor Company General Motors

(Annexure 7)
(Figure 10)
(General Motors, SEC Annual Filings 2020/2019/2018, p.48/48/47)
(Ford Motor Company, Annual Report 2019/2018/2017, p.FS-7/FS-4/FS-4)

Ford:
During 2017, Ford remained very highly geared with 78.59% total non-current liabilities in the
capital structure (Figure 10). During the year, the financial services long-term debt, consisting of
Ford Credit segment, went up by more than 12% (Ford Motor Company, Annual Report 2017,
p.FS-4). Of this, the senior unsecured debt increased by 12.7% while the asset-backed debt
went up by 13% (Ford Motor Company, Annual Report 2017, p.FS-50).

2018 was another bad year for Ford as the gearing, although reduced slightly, largely remained
the same at 77.64%. The slight decrease was led by 4.5% decrease in other liabilities and
deferred revenue, 0.67% decrease in long-term debt of Ford Credit and $164 million of share
buybacks (Ford Motor Company, Annual Report 2018, p.FS-4). During the year, Ford faced
another setback with Moody’s downgrading Ford’s credit rating to just above non-investment
grade bond status, which was largely because of Ford failing to make progress in turning
around the company considering declining profit margins overseas and high gearing (CNBC,
2018).

During 2019, Ford repurchased treasury stock of $196 million, in line with share buyback
program of Ford to offset the effects of convertible debt and employee share-based scheme
(The Motley Fool, 2014). Moreover, the non-current portion of other liabilities and deferred
revenue increased by 7.3%, largely driven by pensions and OPEB plan (Ford Motor Company,
Annual Report 2019, p.FS-40). Moreover, Moody’s cut the credit rating of Ford to junk bond
status of Ba1, reflecting the considerable operating and market challenges facing Ford in
addition to the weak earnings and cash generation likely as the company undergoes a multi-
year costly restructuring plan (CNBC, 2019).

General Motors:
During 2017, GM remained highly geared as well, although 5% lower than Ford at 73.30%.
Compared with 2016, the long-term debt of GM Financial rose by more than 34%, most of which
relates to debt secured against receivables and leasing related assets in securitization
arrangements (General Motors, SEC Annual Filings 2018, p.47/66). Despite of this, Fitch
upgraded the credit rating of GM and its subsidiary GM Financial to BBB from BBB- with a
stable outlook, driven mostly by its improving profitability (Fitch Ratings, 2017).

In 2018, the gearing of GM slightly reduced to 70.52%. This was mostly because of adoption of
new accounting standards, causing over $1 billion loss, paying cash dividend of over $2 billion,
both of which were charged to retained earnings, and accumulated other comprehensive loss of
over $9 billion, which was carried from previous year, further brought down stockholders’ equity
thereby having favorable effect on gearing (General Motors, SEC Annual Filings 2019, p.50).

GM’s gearing was down to 67.89% in 2019. During the year, GM Financial’s long tern debt
reduced by 11%, proving to be a further relief for the gearing ratio (General Motors, SEC Annual
Filings 2020, p.48). Moreover, considering the improving position, Fitch reaffirmed its BBB rating
for GM and GM Financial’s debt (Fitch Ratings, 2019).
Interest cover:

timesx interest cover Comparison

1.24
2019
0.11

1.15
2018
0.68

3.19
2017
1.19

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50

General Motors Ford Motor Company

(Annexure 8)
(Figure 11)
(General Motors, SEC Annual Filings 2020/2019/2018, p.47-69/47-70/46-68)
(Ford Motor Company, Annual Report 2019/2018/2017, p.FS-6-52/FS-3-47/FS-3-51)

Ford had to pay $1.1 billion and $2.9 billion interest on its Automotive and Credit debt in 2017
respectively (Ford Motor Company, Annual Report 2017, p.FS-3-51). Since Ford was very
highly geared during the year at 78.59% (Figure 10), this led to lower interest cover of 1.19x
(Figure 11). Ford’s declining profit margins overseas and rising commodity prices also
contributed to this lower interest cover (The Wall Street Journal, 2018).

In 2018, Ford had to pay $1.2 billion and $3.5 billion on Automotive and Credit debt respectively
(Ford Motor Company, Annual Report 2018, p.FS-3-47). As can be noticed, while interest
payments on debt of Automotive segment slightly increased, Ford Credit saw massive increase
of more than 20% in its interest payment which pulled down the interest coverage to 0.68x
(Figure 11). Also, during the year, Ford performed relatively well in North America which led to
its operating profit increasing by 4% (The Motley Fool, 2019). However, Ford in Europe suffered
losses due to adverse exchange movements and higher costs (The Motley Fool, 2019) which
partly led to decline in OPM (Figure 6), thereby having further unfavorable effect on interest
coverage.
In 2019, Ford’s interest coverage further decreased to 0.11x (Figure 11) which is beyond
abysmal. In part, this was fueled by increase in Ford Credit’s interest payments by more than
17% to $4.1 billion (Ford Motor Company, Annual Report 2019, p.FS-6-52). Moreover, operating
profit declined (Figure 6), partly driven by ongoing restructuring in Europe, China and South
America due to declining profit margins (The Motley Fool, 2020).

General Motors:
Interest coverage of GM stayed healthy at 3.19x compared to Ford in 2017 (Figure 11). This
was because GM was less geared during the year than Ford (Figure 10) and the strategy
relating to cost-cutting implemented by GM (Reuters. 2018) was successful leading to a healthy
OPM (Figure 6).

During 2018, interest coverage of GM declined to 1.15x (Figure 11). This was a result of
restructuring cost of $1.3 billion (CNBC, 2019) and $1 billion paid in rising costs related to
commodities (The Detroit News, 2019), thereby bring down operating profit. Moreover, GM saw
an increase of almost 24% in interest payments (General Motors, SEC Annual Filings 2019,
p.47-70).

Interest coverage improved slightly to 1.24x in 2019 (Figure 11). Although interest payments by
GM increased by almost 14% (General Motors, SEC Annual Filings 2020, p.47-69), GM saw
growth in its OPM (Figure 6) as a result of successful cost-cutting strategy in a declining
industry (Financial Times, 2019).

Investors’ ratio
Earnings per share:
 $ Dollar diluted eps Comparison
4.62
2019
0.01

5.61
2018
0.92

-2.65
2017
1.90

-4.00 -2.00 0.00 2.00 4.00 6.00 8.00

General Motors Ford Motor Company

(Figure 12)
(General Motors, SEC Annual Filings 2020/2019/2018, p.47/47/46)
(Ford Motor Company, Annual Report 2019/2018/2017, p.FS-6/FS-3/FS-3)

Ford:
Ford’s diluted EPS in 2017 stayed at $1.90 (Figure 12). Although NPM was healthy at more
than 4% during the year (Figure 7), Ford issued further common stock of $207 million and
repurchased its own shares of $131 million, which was not enough to offset the issue of
common stock (Ford Motor Company, Annual Report 2017, p.FS-6), thereby limiting the diluted
EPS to $1.90.

In 2018, Ford’s diluted EPS declined by a dollar to $0.92 (Figure 12). This decline was directly
driven by the decline in Ford’s NPM to 2.30% during the year (Figure 7), as otherwise the effect
of $163 million issue of common stock was offset by $164 million treasury stock (Ford Motor
Company, Annual Report 2018, p.FS-6).

Ford’s diluted EPS in 2019 further declined to $0.01 (Figure 12). This was a result of massive
decline in NPM to 0.05% (Figure 7).

General Motors:
In 2017, GM had a diluted EPS of negative $2.65 (Figure 12). This was driven by GM achieving
a negative NPM during the year (Figure 7) which was in turn a result of making loss on selling of
its Opel brand in Europe due to declining profitability margins there (General Motors, SEC
Annual Filing 2018, p.58).

GM’s diluted EPS went back to normal at $5.61 in 2018. As NPM had improved (Figure 7), GM
purchased common stock worth $190 million (General Motors, SEC Annual Filings 2019, p.50),
thereby having further favorable effect on diluted EPS.

In 2019, diluted EPS of GM declined by a dollar to $4.62 (Figure 12). This was driven by NPM
declining to 4.86% (Figure 7) in addition to stock-based compensation further diluting the
shareholding (General Motors, SEC Annual Filings 2020, p.50).
Business analysis
SWOT analysis of Ford:

Weaknesse Opportunit
Strengths Threats
s ies
F-series trucks Product recalls Eco-friendly Increased
and lead in CV and increased vehicles to tap competition
sales in Europe warranty claims into poor markets overseas

Eco-friendly
Dependence on
internal Autonomous and Rise of Tesla and
North America
combustion EV industry EV industry
market
engines

Sky-rocketing
Ford doing better Dependence on
commodities
than GM in sales of F-series
prices and China
Europe trucks
trade war

Strengths:

 Ford derives most of its revenue from F-series pick-up trucks which are very popular in
the United States (Forbes, 2018). In addition, Ford has improved its F-series by adding
EcoBoost technology to its engines, achieving better economy in this segment (CNBC,
2014).
 Ford is the top commercial vehicle brand in Europe, demonstrated by being Europe’s
best CV brand for fifth straight year (The News Wheel, 2020).
Weaknesses:

 Ford suffered high warranty costs, lowering operating profit margin for the 4th quarter of
2019 (S&P Global, 2019), which reeks of operational inefficiencies.
 While strong foothold in North America auto-market is a good thing, Ford is increasingly
becoming dependent on sales in North America (Bloomberg, 2017).
 Ford has become increasingly dependent on sales of F-series trucks (Forbes, 2018).
Opportunities:

 In markets like India, which consists of large population of middle-class/poor and where
feasibility of running EV is poor due to underdeveloped infrastructure (Hindustan Times,
2020), Ford has unique opportunity to develop self-charging hybrid compact cars and
mid-size sedans due to interest and feasibility of hybrid technology (Business Standard,
2019) in order to gain traction in India.
 US electric vehicles sales are expected to rise to 6.9 million units by 2025 (S&P Global,
2020). In order to decrease its dependence on fossil fuels, Ford has an opportunity
develop a full-size sedan, such as Taurus, which was once America’s best-selling sedan
(Boston.com, 2018), to rival the popular Tesla Model S but it needs to be affordable in
order to appeal to the middle-class and not exclusive to the wealthy like Tesla Model S
(MIT Technology Review, 2013).
 Since rich car owners like exclusivity (Limelight, 2019), Ford can take advantage of this
by developing a high-end electric full-size sedan to truly compete with Tesla Model S
under its Lincoln brand.
 Lastly, with the rise of autonomous driving technology, Ford can increase capital
expenditure in autonomous technology to tap into unique ride-hailing and delivery
services (CNBC, 2018).
Threats:

 Rise of EVs and Tesla in general pose a threat to Ford’s market share in the US
(Harvard Business Review, 2020).
 Ford is facing tough competition in overseas markets and if this persists, Ford might lose
its market share and have to eventually exit these markets (CNBC, 2019)
 The rising commodities prices (The Economic Times, 2016), in addition to the China
trade war (CNBC, 2019), have been consistently affecting Ford’s profit margins.
PEST analysis of Ford

Political

Economic

Social

Technological

Political:
Ford manufactures engines at two British locations and sends them to Germany for fitting in
cars (Reuters, 2019). In case of “hard Brexit”, Ford would suffer $1 billion in tariffs (Reuters,
2019). Furthermore, China plans to impose 25% tariffs on vehicles entering China and Ford has
the most to lose among US carmakers (CNBC, 2019).

Moreover, last year, despite of Brazil’s government granting automakers a 15-year package of
tax breaks – extending subsidies (Reuters, 2019), Ford has been facing hard time in South
America, resulting in closure of plant in Brazil (Automotive News, 2019).

Economic:
The trade war between Beijing and Washington has automakers preparing for a possible
economic downturn as a result of sky-rocketing costs of raw materials, adding to the weak
demand for foreign cars in China (Reuters, 2019). In addition to this, in 2018 alone, Ford took a
$3.3 billion blow from higher tariffs and commodity costs, unfavorable foreign exchange
(Reuters, 2019).
Social:
In 2019, Ford said it will close down its Factory in San Bernardo, after consistent decline in
profitability margins, which will lead to 2800 job cuts, a blow in a country with more than 10%
unemployment rate (BBC, 2019). However, Ford has said that it knows the impact closure of the
factory will have on its employees there and has committed to work closely with all stakeholders
on the next steps (BBC, 2019). In addition to this, a no-deal Brexit would have dire
consequences for over 7000 workers that it employs at its UK factories (IndustryWeek, 2019).

Moreover, recently, China imposed a mandate on automakers requiring that electric vehicles
(EVs) make up 40% of all sales by 2030 (MIT Energy Initiative, 2020). Ford has to adapt to this
shift in attitude to remain competitive in largest auto market in the world (Minor Minerals Trade
Association, 2017).

Technological:
In 2017, global EV sales passed 1 million units and under the current trajectory, sales could be
quadrupled by 2020 (McKinsey, 2018), along with hyper growth in market for autonomous
driving (IndustryWeek, 2017). In order to keep up, Ford invested $1 billion in Argo AI and plans
to spend around $4 billion by 2023, dedicated to building autonomous vehicles business
(TechCrunch, 2018). Also, Ford has entered into agreement with VW to share costs of
developing self-driving EVs (The New York Times, 2019).
Conclusion
Ford has consistently outdone GM in terms of total sales, as shown by figure 1, despite of
having a significantly less market-share in the United States. From my analysis, this has been a
result of Ford having greater brand recognition in Europe and so doing well than GM, shown by
how much their commercial vehicles are preferred there, which exited Europe by selling its
subsidiary Opel after suffering losses. In 2019, Ford suffered losses but this was largely due to
the fact that auto industry had been slowing down. Ford can take advantage of that brand
recognition, especially its solid reputation for F-series trucks in North America, Ford Ranger in
Australia and Europe and commercial vehicles in Europe, after making them eco-friendlier, to
achieve growth in global revenue.

Ford has been taking a hit from ongoing tariffs war with China and higher cost of commodities,
in addition to the poor working efficiency, thereby pushing down its profitability margins and poor
return on capital employed compared with those of GM, and they might have to work out a
strategy relating to hedging these costs if they want achieve growth in profit margins in the
foreseeable future. This will certainly have a cost and the managers will have to consider
whether these costs outweigh the benefits.

The current ratio of Ford has stayed just above 1x which although better than that of GM is still
poor. Ford has been having recalls and higher warranty costs. In short, it is cutting corners and
compromising quality over speed and quantity of production. Furthermore, it has stayed highly
geared compared with GM and has had to face its credit ratings degraded to junk-bond status.
This is alarming since Ford will have to offer higher interest to raise any further debt for research
and development because it is hard to see how funds can be secured via rights issue or equity
offering without dilution of control and considering the already depressed share price. The
gearing of the company needs to be dealt with on emergency basis, considering the $4 billion
investment goal into autonomous driving technology.

Recommendations
 Ford is very highly geared leading to poor interest cover. I recommend that Ford
suspend its share buyback program, which although provides cash to shareholders but
gearing is at alarming level, and use those resources to pay off long-term debt.
 To save its profitability from further decline in an economic downturn, it should consider
hedging the purchase of raw materials.
 Ford should invest in development of cheaper hybrid and electric vehicles to remain
competitive in India and China.
 Ford should invest more in autonomous driving technology to keep up with competition.
 Lastly, to reduce operational inefficiencies, Ford should enhance its methods of
forecasting working capital needs and better training of staff.