.. sistency within Fords manufacturing plants. Fords borrowing can be explained by its leverage ratios. Fords debt ratio has remained relatively steady over the last 5 years. 1998s debt ratio was 82.65%. This shows how they were relying heavily on borrowed funds to finance operations.
This is further evinced by Fords debt-to-equity ratio of 4.77 in 1998, which is up from past years. Compared to the 1.97 industry average, Fords number appears quite high. Fords times-interest-earned for 1998 was 3.68, an increase from previous years. This could be due to the $15,955 million gain Ford recorded as a result of the spin-off of their interest in The Associates, Inc. The liquidity of Ford, indicated by its current ratio of .41, shows that they have many current liabilities. This number is much lower than the industry average of 1.8.
Fords quick ratio has trended upward over the last 4 years, with 1998 finishing at .29. This is, again, below the industry average of .90. With a company as large as Ford, having as many current liabilities as they do is not necessarily an indication of a problem. Dupont Fords efficiency can be determined by examining the asset turnover ratio and the days inventory held ratio. These show how effectively Ford is using its assets.
The asset turnover ratio for Ford has averaged .71 times over the last 5 years. 1998 turnover was .79 times. The days inventory held ratio for Ford has fluctuated over the past 5 years. Fords reduction from their 1994-1995 average of 25.79 days to 22.25 in 1996 was a significant improvement. Their further reduction to a 1997-1998 average of 19.07 shows a continued effort by Ford to reduce inventory costs.
Days sales outstanding (average collection period) in 1994-1997 saw a range of 8.23 days to 9.24 days. Ford improved this number significantly in 1998 to 6.49 days. Fords profitability is measured by the net profit margin, rate of return on assets (ROA), payout ratio, and rate of return on common shareholders equity (ROE). Fords net profit margin for 1998 was 9.48%, which is their best return in the last 5 years. Their increasing profit margin means the company is allowing more sales dollars to become profit dollars.
The ROA for Ford in 1998 was 5.02%, compared to the industry ROA of 3.1%. This indicates that Ford is making above average use of their assets relative to other auto manufacturers. Although this rate in comparison looks good, it is Fords lowest ROA in 4 years. The ROE for Ford in 1998 was at 27.07%. Taking into account the industrys average of 16.8%, Ford appears to be maintaining a high level of shareholder wealth. The payout ratio measures the percentage of earnings that are paid out as dividends. In 1998, Ford paid out .10 of its earnings to shareholders. This is down from .29 in 97 and from .41 in96. Research and Development costs for 1998 and 1997 were $6.3 billion, which was 4.4% and 4.1% of their sales, respectively.
These expenditures are a necessary cost for a firm such as Ford. Market Data Market-value ratios indicate what investors believe the company is worth. Fords 1998 price/earnings (P/E) ratio of 12.64, meaning investors are willing to pay $12.64 per each dollar of earnings. This has more than doubled from 1997, a positive signal from investors to Ford management. Market-to-book value for 1998 was 1.74.
This is significantly higher than in the previous 5 years. This means that Ford is worth 74% more than stockholders of the past and present have invested. Impact of Unions Unions play a large role within the Ford Motor Company, employing vast numbers of its workforce. The United Auto Workers (UAW) union represents these employees. From managements viewpoint, the effects of having the UAW can be both positive and negative.
Employees with representation, who reap the benefits of a strong and organized labor union, are more satisfied, and therefore more efficient, employees. Negative effects occur when labor disputes threaten to cripple a company as a result of strikes and walkouts. In order to prevent such potentially disastrous events, Ford could be forced into expensive compromises that could erode profit margins. For this reason, Ford has at its disposal $22 billion in cash in order to limit the threatening power of its unionized employees. Effect of Economic Conditions: One of the economic conditions that Ford faces is interest rate swings.
Since the majority of sales are made to consumers on credit, interest rate fluctuations tend to affect individuals willingness to spend large amounts of disposable income and are therefore a concern to Ford. In addition, in order to comply with pollution and hazardous waste control standards, Ford will spend $74 million in 2000 and $73 million in 2001. By 2004, Ford expects to have spent $348 million total on these compliances. SWOT Analysis: Being such a well-established company, Ford has come to possess many strengths. Their brand name is recognized and respected worldwide.
The immense size of the company gives them economies of scale in all of their production facilities and administration procedures. Additionally, Fords three strong subsidiaries make them a well-diversified company. Their ownership interests in numerous other companies complete their diversification status. Ford has product lines whose breadths and depths make it possible to reach all target markets. Their use of in-house suppliers helps reduce inventory costs so they are able to utilize these extra savings elsewhere. Fords large size could also be a source of weakness to them.
This is because of the possible bureaucracy within the company; red tape that may make changes difficult to accomplish. Another implication of their size is that timely reactions to changes in the industry could be hard to come by. A more tangible weakness is that in 1998 sales were down from the previous two years. The opportunities for Ford lie in their ability to lead the automotive industry in a global expansion. Their use of technology will allow them to accomplish this task.
Internet and E-Commerce are two examples of technological opportunities available to Ford. Examples of their attempts to lead the industry were mentioned previously. The threats that face Ford include an increasing number of well-informed consumers attributable to the availability of information on the web. The demand for higher quality vehicles at cheaper prices has forced the automobile manufacturers to become more efficient and competitive. Honda, GM, and Chrysler are Fords main competitors in the industry.
Even though the worldwide automotive market is very large the companies in this industry are fiercely competitive for every part of the market. Summary: For the past 5 years, Ford has been a leader in the automobile industry. They are the number one maker of cars and the number two maker of trucks in the world, assuring them a strong market share. Their estimated 17.11% long-term annual growth rate shows they do not face a going concern problem and that they expect to be profitable for many years to come. Between 1997 and 1998, net income rose by 10%, as did earnings per share and dividends per share. Between those two years, the common stock price rose by 31% and total shareholder returns by 32%. Vehicle unit sales and the total company sales and revenues were both down by 1% in 1998.
Current stock price: Ford is traded on the NYSE under the symbol F. As of March 17th 2000, Fords current stock price was listed at $44.625. This is close to its 52- week low of $40.25. The 52- week high was $67.875. With 1,222 million shares outstanding, this gives Ford a market capitalization rate of $54,531 million.
Dividends per share were $1.84 and earnings per share were $5.86. Thus, our Price/Earnings Ratio is 7.61. Average daily trading volumes for Ford are 4,022,000 shares. A regression analysis of Ford produces a beta of 1.0151. This beta appears correct when compared with well-known financial news providers estimates. Data from the last two years, most recently being January 1st, was used to find a market return of 20.90% and a risk-free rate of 1.49%.
Inserting these numbers into the Capital Asset Pricing Model (CAPM), a resulting stock price of $52.81 emerges. Using published betas for a comparison reference, the CAPM produces stock values between $37.61 and $54.38 and a weighted-average of $50.09. Using the January 1st stock price of $52.75, it appears that Fords stock is correctly valued. This makes sense, considering that Ford is a large, widely held, and often-analyzed firm. Bibliography Sources Web Sites: http://www.askjeeves.com http://www.astonmartin.com/ http://www.auto.com http://www.bloomberg.com http://www.cbs.marketwatch.com/ http://www.cnbc.com http://www.cnnfn.com http://www.fool.com http://www.ford.com/ http://www.fortune.com http://www.hoovers.com http://www.jaguar.com http://www.lincolnvehicles.com http://www.mazdausa.com/ http://www.mercuryvehicles.com/ http://www.morningstar.com http://www.msn.moneycentral.com http://www.quicken.com http://www.smartmoney.com http://www.thestreet.com http://www.uaw.org http://www.volvocars.com/ http://www.yahoo.com http://www.zacks.com Books: Brealey, Richard A., and Myers, Stewart C.
Principles of Corporate Finance. Sixth ed. McGraw Hill, New York, 2000. Brigham, Eugene F., and Houston, Joel F. Fundamentals of Financial Management. Second ed. Dryden, New York, 1999. Business Essays.