Ratio Analysis and Statement of Cash Flows for Ford and GM

General Motors and the Ford Motor Company are the number one and number two, automotive manufacturers in the United States, respectively. Both companies strive for success each and every year. The success of these two automotive giants, as well as other corporations, can be measured by analyzing a few important goals of management, the company’s solvency, liquidity, and profitability. To enable investors and creditors to analyze these goals, each company distributes annual financial statements. With these financial statements, each company can be measured by analyzing factors such as return on sales, current ratio, earnings per share (EPS) debt ratio, and their price-earning ratio.

Liquidity

Liquidity can be defined as having enough money on hand to pay bills when they are due and to take care of unexpected needs for cash, while profitability refers to the ability of business to earn a satisfactory income.

Moody’s Investor Service a provider of independent credit ratings and financial research information, and is a standard in the financial world reported that Ford’s liquidity remains very strong, with $23 billion in cash, securities, and short-term voluntary employee beneficiary association balances. That report is of March 31, 2005.

GM’s liquidity is positioned at $32 billion in balance sheet debt, $3 billion in present value of leases, and about $9 billion in un-funded pension liabilities (mostly international). Moody’s Investor Services estimated that GM’s balance sheet debt should mature within 19 years with only about $3 billion maturing over the next five years.

Profitability

The profit margin, which is net income, divided by net sales, is a measure of how many dollars of net income is produced by each dollar of sales. The Ford Motor Company is claiming the higher prices for gasoline, raw materials and health care, among other things, when describing why its 2005 earnings will fall as much as 35 percent from the previous year.

The automaker also said it no longer expects to post annual pre-tax profits of $7 billion as early as 2006, blaming “vastly different market and business conditions.”

The warning comes as a setback for Ford Chairman and CEO Bill Ford Jr., who in 2001 started a major restructuring of the company. Ford has taken very aggressive steps to cut costs, including plant closings, job reductions, and a cut in its annual dividend. Over the past three years, it has reduced expenses by $4 billion. Ford is also planning a new round of early-retirement offers to cut an estimated 1,000 additional U.S. white-collar posts in the upcoming months.

Ford’s profit fell to $1.21 billion, or 60 cents a share, from $1.95 billion, or 94 cents a share, a year ago. Ford said sales rose to $45.1 billion from $44.7 billion, led by a 1.3% increase in worldwide automotive revenue.

Ford Motor, broad sided investors earlier this month when it warned that it would miss 2005 estimates and come up shy of its highly publicized $7 billion target for 2006.

General Motors Corporation warned last month its 2005 profits would plunge as much as 80 percent because of falling U.S. sales, an unfavorable product mix and escalating health care costs.

General Motors was slammed by lower sales and also by mounting health-care costs, turned in a $1.1 billion, first-quarter loss Tuesday. The company also didn’t help its cause when they failed to turn in a full-year outlook.

Solvency

GM announced last month that it would negotiate with UAW union leaders to shift more health care costs to hourly employees, in an effort to achieve fiscal solvency. According to GM’s company data, their salaried employees are responsible for about 27% of their health care costs, and the hourly employees are responsible for about 7%. Interesting enough salaried employees also pay deductibles and monthly premiums for their health care coverage.

Pension industry experts are hesitant to predict if other companies or industries might follow suit. But most acknowledge they are watching General Motors Corp. and Ford Motor Co. because of the recent bond rating they both received by Standard & Poor.

In an effort to lower those costs GM is expanding on its LifeSteps program they launched in 1996. The program encourages employees against smoking, drinking alcohol, and eating unhealthy foods. Under the program the company also added gyms and health care seminars to some of their manufacturing plants.

FORD

Current Ratio = Current Assets/Current Liabilities $292,654.0 / $276,609.0 = 1.058

Return on Sales = Net Income before Taxes/Sales $4,853.0 / 3,915.0 = 1.239

Earnings per Share = Net Income/Outstanding $3.5 / 1,831 = $1.73 * I am assuming the outstanding is the outstanding shares?

http://www.corporate-ir.net/ireye/ir_site.zhtml?ticker=F&script=412&layout=-6&item_id=664623

Debt ratio = Total Liabilities/Total Assets = $305,126 / 292,597 = 1.042

Price Earnings Ratio = Price of Share/Earnings per Share = 1.1

GM

Current Ratio = Current Assets/Current Liabilities = 336,988.0 / 113,635.0 = 29.656

Return on Sales = Net Income before Taxes/Sales = 1,894.0 / 191.60 = 9.885

Earnings per Share = Net Income/Outstanding = 2,805 / 565.5 = 0.44???

Debt ratio = Total Liabilities/Total Assets = 113,635.0 / 479,603.0 = 0.236

Price Earnings Ratio = Price of Share/Earnings per Share = 1.2

References

Hoover’s Inc. (2005). General Motors Corporation. Retrieved May 13, 2005, from http://www.hoovers.com/general-motors/–ID__10640,ticker__GM–/free-co-fin-valuengine.xhtml

Taub, S. (2005). Moody’s Downgrades Ford, but Not to Junk. Retrieved May 13, 2005, from http://www.cfo.com/article.cfm/3979593/c_3979617?f=home_todayinfinance

Associated Press (2005). Default raises question about solvency of pension plans. Retrieved May 13, 2005, from http://www.qctimes.com/internal.php?story_id=1050939&t=Business&c=31,1050939

Phillips, D. (2005). Higher costs force Ford to slash profit estimates. Retrieved May 13, 2005, from http://www.detnews.com/2005/autosinsider/0504/11/-144610.htm

Medical News Today (2005). Wall Street Journal Examines Impact of Rising Health Costs on Automaker GM. Retrieved May 13, 2005, from
http://www.medicalnewstoday.com/medicalnews.php?newsid=22543

Hoover’s Inc. (2005). General Motors Corporation. Retrieved May 13, 2005, from http://www.hoovers.com/ford/–ID__10597–/free-co-fin-annual.xhtml

Business Week Online (2004). 2005 Investment Outlook Scoreboard. Retrieved May 13, 2005, from http://bwnt.businessweek.com/investment_outlook/2005/index.asp?sortCol=peg&sortOrder=DESC&pageNum=1&resultNum=25&industry=1