case

Objectives:

· Conduct a business size up and financial ratio analysis.

· Understand the differences and similarities between comparable firms.

· Assess a company’s financial statements and use ratios to understand the company’s financial position.

· Identify any major issues with a company and suggest an appropriate investment strategy.

Questions:

1. As a current investor, what is your overall assessment of Ford?

2. How would you describe Ford’s comparative performance and financial position? Examine Ford’s financial ratios. What does each ratio tell you about Ford’s financial status?

3. As a current investor in Ford, which elements of financial performance are most important?

4. As John Smith in January 2018, would you buy more Ford stock, continue to hold current Ford stock, or sell the Ford stock? If you decide to sell, in which other automotive manufacturers would you invest?

Financial Statement Analysis

Essentials of

Financial Statement Analysis

Time-Series vs. Cross-Sectional
What is time-series analysis?
 One company over multiple periods
 Identifies trends over time for single company

What is cross-sectional analysis?
 Multiple companies in one period
 Similarities and differences across companies (benchmarks)

Tools for Financial Statement Analysis
1. Cause of Change Analysis
2. Common Size Statements
3. Trend Statements
4. Financial Ratios

Cause of Change Analysis
Net Income drops from $100 to $50
What caused the change in performance?
 Lower revenues?
 Higher expenses?
 Change in tax rate?

Cause of Change Analysis
How does it work?
 Column 1: Statement for FY1
 Column 2: Change 1st variable to FY2 level and look at effect
 Column 3: Change 2nd variable to FY2 level and look at effect
 Continue until all variables are changed to FY2 levels

Cause of Change Analysis

Common Size Statements
Which firm is more profitable?
 $1000 in profit for a firm with $2000 in sales
 $100 in profit for a firm with $150 in sales

Which firm has more debt?
 $1000 in bonds for a firm with $2000 in assets
 $100 in bonds for a firm with $150 in assets

Common Size Statements
Income Statement
 Scale everything by Sales
Balance Sheet
 Scale everything by Total Assets
Time-Series or Cross-Sectional?
 Time-Series = Differences in same firm over multiple periods
 Cross-Sectional = Differences in multiple firms in same period

Common Size Income Statement

Common Size Balance Sheet

Trend Statements
Income Statement and Balance Sheet
 Scale everything by baseline
What is baseline?
 Depends on Time-Series vs. Cross-Sectional
 Time-Series: Baseline is first fiscal period
 Cross-Sectional: Baseline is single firm

Trends Income Statement

Trends Balance Sheet

Financial Ratios
Should be relevant relationship
 Does Debt / Assets provide information?
 What about Debt / Sales?

No single “correct” way to compute many financial ratios
 ROA Version 1: EBI / Total Assets
 ROA Version 2: Net Income / Total Assets

KEY: Is it the economics of business, or is it the accounting?

Financial Ratios
A closer look at Return on Assets:

Changes in ROA  Changes in Net Profit Margin and Asset Turnover

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Financial Ratios

*NOTE: Profit and Income are usually interchangeable; that is the case here.

Gross Profit = Sales – COGS

Operating Profit = Gross Profit – Operating Expenses

Net Profit = Operating Profit – Interest – Taxes

Working Capital = Current Assets – Current Liabilities

Earnings per Share = Net Profit / Shares Outstanding

Profitability Ratios

Gross Profit Margin = Gross Profit / Sales

Operating Profit Margin = Operating Profit / Sales

Net Profit Margin = Net Profit / Sales

Return on Assets = Net Profit / Total Assets

Return on Equity = Net Profit / Shareholders’ Equity

Leverage Ratios

Debt to Equity = Total Liabilities / Shareholders’ Equity

Debt to Assets = Total Liabilities / Total Assets

Interest Coverage = Operating Profit / Interest

Liquidity Ratios

Current Ratio = Current Assets / Current Liabilities

Quick Ratio = (Current Assets – Inventory) / Current Liabilities

Efficiency Ratios

Total Asset Turnover = Sales / Total Assets

PPE Turnover = Sales / PPE

Cash Turnover = Sales / Cash

Working Capital Turnover = Sales / Working Capital

Market Ratios

Price-to-Earnings = Market Price per Share / Earnings per Share

Price-to-Book = Market Price per Share / Book Value per Share

Dividend Yield = Dividends per Share / Market Price per Share

Dividend Payout = Dividends per Share / Earnings per Share

Miscellaneous

Sales Growth = (New Sales – Old Sales) / Old Sales

Copyright

Product Number: 7B18N

0 27 Title: Ford

Motor Company: Basic

Financial Ratio

s – Student Spreadsheet

This spreadsheet supports the product 9B18N027. Prepared by: Zhichuan (Frank) Li, Xiaojun Zhu, Danieta Zapata, Tabish Munir Last Revised: February 13, 2019 No part of this file may be reproduced, stored in a retrieval system, posted to the Internet, or transmitted in any form or by any means without the permission of Ivey Business School Foundation. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.6

61

.3208; (e) cases@ivey.ca; www.iveycases.com. © 2019 Ivey Business School Foundation

Balance Sheet

Balance Sheet

Ford

2017
2016
2017
2016
2017
2016

7

7

,879

3

,825

,

5

,4

2

3

,209

,902

,461

,203

0

6

,487

,951

,600

,776

41
41

14
15

23

257,808
237,951
442,030
430,573
212,482
221,690
170,316
162,035

	In millions of US$				Toyota				General Motors				Honda
	(except per share)																2017																2016
Assets
Cash & marketable securities		38,	92		38,		82		26	26,	15		23		24		41		18,919		15,126
Accounts receivable	62,809	11,102	78,520	83,027	8,164	8,700	23,744	24,468
Inventories	10,277	8,898			21	36	18,	34	10,663	11,040	12,255	11,	67
Prepaid expenses & other current assets	3,889	49,634				33	34,492	26,092	32,048	3,974	4,211
Total current assets		115		108	160,044	162,0	14	68,744		76	58,892	55,478
Net plant, property & equipment	35,327	32,072	91,511	86,662	36,253	32,603	65,627	60,601
Investments	31,320	32,133	175,	563	166,799	9,0	73	8,996	27,586	27,396
Deferred income taxes	10,973	9,705	8,601	23,544	33,172	1,091	1,607
Other assets	64,	286	55,	580	12,912	6,497	74,868	70,	71	17,120	16,953
Total long-term assets	141,906	129,490	279,986	268,559	143,738	1		45	111,424	106,5	57
Total assets		257,808			2	37		442,030		430,573		212,482		221,690		170,316		162,035
Liabilities
Short-term borrowings & notes payable	48,265	46,984	91,368	85,069	26,965	23,797	10,440	9,846
Accounts payable	23,282	21,296	53,197	48,570	23,929	23,333	9,	103	8,547
Other current liabilities	23,053	22,001	10,860	9,823	25,996	38,051	29,228	30,231
Total current liabilities		94	90,281	155,425	143,462	76,890	85,181	48,771	48,624
Long-term debt	102,666	93,301	88,949	86,944	67,254	51,326	36,758	33,829
Other liabilities	25,611	25,131	35,939	47,041	33,337	41,347	19,247	19,480
Total liabilities	222,877	208,713	280,313	277,447	177,481	177,854			104	101,933
Shareholders’ equity
Common equity	3,567	3,529	773	765
Retained earnings	21,218	15,634	158,	127	149,282	17,627	26,168	60,308	55,060
Treasure stock, reserves & other equity	13,672	13,563	315	17,360	17,653	4,459	4,277
Total equity	34,931	29,238	161,717	153,126	35,001	43,836	65,540	60,102
Total liabilities and equity

Income Statement

Income Statement

In millions of US$
Ford

Toyota

General Motors

Honda

(except per share)
2017
2016
2017
2016
2017
2016
2017
2016

,800

,513

11,527

0
0

271
295
575
563
115
151

286
0
0

237

DA

EBIT
4,813

18,449
23,793
10,016
9,962
7,777

1,811

Revenue	156,776		151	255,286	236,786	145,588	149,184	129,498	121,724
-Cost of goods sold	140,436	135,087	210,302	18	8,453	114,869	120,499		100	94,474
Gross profit	16,340	16,713	44,984	48,333	30,719	28,685	28,985	27,250
-Operating expenses		11,527	10,927	26,535	24,540	20,703	18,723	21,208	23,054
ÉÉSelling, general & administrative	10,972	16,937	15,740	9,	575	10,354	14,812	17,580
ÉÉOther operating expense	9,597	8,800	11,128	8,369	6,396	5,474
Operating income		4,813	5,786		18,449		23,793		10,016		9,962		7,777	4,196
-Non-operating (income) loss	-3,335	-1,055	-1,845	-1,079	-1,847	-2,046	-1,538	-1,101
++Interest expense, net	1,023	608		271		295	309	381	-184	-86
+++Interest expense	1,133	894
— Interest income	110	266	182	299
ÉÉOther non-operating (income) loss	-4,358	-1,663	-2,116	-1,374	-2,156	-2,427	-1,354	-1,015
Pretax income	8,148	6,841	20,294	24,872	11,863	12,008	9,315	5,297
Income tax	546	2,245	3,356	5,592	15,727	2,581	3,612	3,388
	Net income		7,602		4,596		16,938		19,280		-3,864		9,427		5,703		2,872
Reference items
	EBIT	13,266	14,458	33,350	37,346	22,277	19,781	14,014	9,704
5,741	4,197
Common shares outstanding	3,901	3,902	3,263	3,338	1,420	1,524		1,811
Earnings per common share	1.91	1.16	5.6		6.18	-2.65	6.12	3.16	1.59

Cash Flow

Ford

Toyota

General Motors

Honda

2017
2016
2017
2016
2017
2016
2017
2016

Net income
7,602
4,596
16,938
19,280
-3,864
9,427
5,703
2,872

8,453

2,833

580

0
0
0
0

-0.1

5

-12

103

38,927
38,827

18,919
15,126

Cash Flow Statement
In millions of US$, except per share
Cash flows from operating activities
Non-cash Items	-792	3612	293	1,451	11,956	–	2,833	-4,127	2,252
Depreciation & amortization	8,717	14,902	13,554	12,261	9,819	6,237	5,508
Change in non-working capital	2,925	-551	2,903	-3,015	373	963
Cash used for operating activities	18,096	19,850	31,582	37,188	17,338	16,993	8,186	11,595
Cash from investing activities
Investments in property, plant & equipment	-7,049	-6,992	-10,940	-10,341	-8,453	-8,384	-5,724	-7,055
Net change in long-term investment	-14,713	-17,173	-22,233	-7337
Other investing activities	2,370	-1,187	5290	-8,854	-15,619	-26,635	-413	-239
Cash used for investing activities	-19,392	-25,352	-27,883	-26,532	-24,072	-35,019	-6,137	-7,294
Cash flows from financing activities
Dividends paid	-2,584	-3,376	-5,869	-5875	-2,233	-2,368	-1,500	-1,322
Repurchase of common stock	-131	-145	-6,512	-2,528	-3,507	-2,500		-0.1
Increase (decrease) in debt	6,260	11,028	9,536	5,492	18,455	21,027	3,312	1,280
Other financing activities	-151	-107	-626	-620	-305	-163	-744	-752
Cash from financing activities	3,394	7,400	-3,471	-3,531	12,410	15,996	1,068	-794
Effects of exchange rate changes	489	-265		-12	-1,666	348	-213	-1,124
Net change in cash	2,587	1,633	5,459	6,024	-2,243	3,105	2,383
Reference items
Cash & cash equivalents	52,999	48,736	23,825	24,415

Financial Ratio

Ford

Toyota

General Motors

Honda

2017
2016
2017
2016
2017
2016
2017
2016

0.34

0.31

0.39

0.89

27

127
21
21
67
73

61
57
92
94
76
71
33
33

27
24
37
36
34
33
45
45

0.63

0.55

0.56

1.8%

3.3%
4.5%

1.8%

11.0%

22.4%

3.1%
3.8%

6.0%
3.4%

4.5%

10.5%

8.0%
7.2%

4.8%

8.1%

4.4%
2.4%

3.3%

7.8%

0.5%

%

-2.7%

8.99

2.1

1.17
1.13

6.18

0.64

0.55

0.76

13.67

4.97

108
104
104
100
26
27
82
82

Comparative Financial Ratios
Liquidity Ratios
Cash ratio	0.41	0.43		0.34		0.31	0.29		0.39
Acid test ratio (Quick ratio)	1.08			0.55	0.68		0.76	0.42	0.87	0.81
Current ratio	1.23	1.20	1.03		1.13		0.89	1.21	1.14
Efficiency
Days receivables	146	112
Days payables
Days of inventory
Financial leverage
Debt to total assets	0.86	0.88		0.63		0.64	0.84	0.80	0.62
Leverage ratio	6.38	7.14	1.73	1.81	5.07	4.06	1.60	1.70
Long-term leverage ratio	2.94	3.19	0.57	1.92		1.17		0.56
Total debt to EBITDA	16.80	14.44	8.41	7.43	7.97		8.99	7.48	10.50
Interest coverage ratio	4.25	6.42	68.08	80.65	17.42	17.69	67.63	27.7
Profitability
Return on common equity	2		1.8%	15.7%		1	0.5%	12.6%	–	11.0%	21.5%	8.7%		4.8%
Return on assets	2.9%	1.9%		3.8%			4.5%	-1.8%	4.3%			3.3%
Return on invested capital	1.4%		6.0%	-1.5%		7.8%		3.4%
Gross margin	10.4%	17.6%	20.4%	21.1%	19.2%		2	2.4%
EBITDA margin	8.5%	9.5%	1	3.1%	15.8%	15.3%	13.3%	10.8%		8.0%
Operating margin		7.2%	10.0%	6.9%	6.7%
Pretax margin	5.2%	7.9%		8.1%		4.4%
Net income margin	3.0%	6.6%		-2.7%	6.3%
Growth and valuation
One-year sales growth	0.7%	5.1%	-2.4%	-12.9%	6.4%	11.7%
One-year operating income growth	-16.8%	-17.8%	-22.5%	-5.4%	79.9%	85.3%	-31.5%
One-year net income growth	65.4%	-37.7%	-1	2.1	-3.0%	-141.0%	98.6%	-38.3%
Enterprise multiples	2.95	2.54	7.19	2.36	7.32	9.17
Enterprise value-to-sales	0.25	0.24	0.36	0.28	0.79	0.73
Price earnings ratio (P/E)	7.85	6.92	5.60	5.80	5.51	9.82	16.11
Activity ratio
Asset turnover	0.61	0.58	0.69	0.67	0.75
Accounts receivable turnover	2.50		13.67	3.25	2.85	17.83	17.15	5.45		4.97
Inventory turnover	15.18	9.81	10.27	10.77	10.91	8.2	8.09
Accounts payable turnover	6.36	6.57	9.31	9.39	4.84	11.06	10.52
Cash conversion cycle (days)

image1