{"id":4160,"date":"2020-10-26T16:49:32","date_gmt":"2020-10-26T16:49:32","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-financialaccounting\/?post_type=chapter&p=4160"},"modified":"2020-12-03T23:09:54","modified_gmt":"2020-12-03T23:09:54","slug":"putting-it-together-financial-statement-analysis","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/chapter\/putting-it-together-financial-statement-analysis\/","title":{"raw":"Putting it Together: Financial Statement Analysis","rendered":"Putting it Together: Financial Statement Analysis"},"content":{"raw":"The following summarized financial statements for Ford Motor Company<\/a> were downloaded from Morningstar into an Excel spreadsheet and then reformatted slightly and double checked against the audited financial statements:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Ford Motor Company<\/th>\r\n2017<\/th>\r\n2018<\/th>\r\n2019<\/th>\r\n<\/tr>\r\n<\/thead>\r\n
in millions<\/td>\r\n<\/tr>\r\n
Total Revenue<\/th>\r\n$ 156,776<\/td>\r\n$ 160,338<\/td>\r\n$ 155,900<\/td>\r\n<\/tr>\r\n
Cost of Goods and Services<\/th>\r\n131,322<\/td>\r\n136,269<\/td>\r\n134,693<\/td>\r\n<\/tr>\r\n
Gross Profit<\/th>\r\nSingle line<\/span>25,454<\/td>\r\nSingle line<\/span>24,069<\/td>\r\nSingle line<\/span>21,207<\/td>\r\n<\/tr>\r\n
Subcategory, <\/span>Operating Expenses<\/strong><\/td>\r\nSingle line<\/span><\/td>\r\nSingle line<\/span><\/td>\r\nSingle line<\/span><\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Selling, General and Administrative Expenses<\/th>\r\n11,527<\/td>\r\n11,403<\/td>\r\n11,161<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Other Income\/Expense, Operating<\/th>\r\n9,114<\/td>\r\n9,463<\/td>\r\n9,472<\/td>\r\n<\/tr>\r\n
Total Operating Expenses<\/th>\r\nSingle line<\/span>20,641<\/td>\r\nSingle line<\/span>20,866<\/td>\r\nSingle line<\/span>20,633<\/td>\r\n<\/tr>\r\n
Total Operating Profit\/Loss<\/th>\r\nSingle line<\/span>4,813<\/td>\r\nSingle line<\/span>3,203<\/td>\r\nSingle line<\/span>574<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/tr>\r\n
Subcategory, <\/span>Non-Operating Income\/Expenses, Total<\/strong><\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Interest Expense Net of Capitalized Interest<\/th>\r\n(1,133)<\/td>\r\n(1,228)<\/td>\r\n(1,049)<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Interest Income<\/th>\r\n461<\/td>\r\n700<\/td>\r\n809<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Gain\/Loss on Investments and Other Financial Instruments<\/th>\r\n(22)<\/td>\r\n115<\/td>\r\n144<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Share of Profit and Interest from Associates<\/th>\r\n1,208<\/td>\r\n165<\/td>\r\n52<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Gain\/Loss on Extinguishment of Debt<\/th>\r\n0<\/td>\r\n0<\/td>\r\n(55)<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Other Income\/Expense, Non-Operating<\/th>\r\n2,821<\/td>\r\n1,390<\/td>\r\n(1,115)<\/td>\r\n<\/tr>\r\n
Pretax Income<\/th>\r\nSingle line<\/span>8,148<\/td>\r\nSingle line<\/span>4,345<\/td>\r\nSingle line<\/span>(640)<\/td>\r\n<\/tr>\r\n
Provision for Income Tax<\/th>\r\n(520)<\/td>\r\n(650)<\/td>\r\n724<\/td>\r\n<\/tr>\r\n
Net Income from Continuing Operations<\/th>\r\nSingle line<\/span>7,628<\/td>\r\nSingle line<\/span>3,695<\/td>\r\nSingle line<\/span>84<\/td>\r\n<\/tr>\r\n
Non-Controlling\/Minority Interests<\/th>\r\n(26)<\/td>\r\n(18)<\/td>\r\n(37)<\/td>\r\n<\/tr>\r\n
Net Income after Non-Controlling\/Minority Interests<\/th>\r\nSingle line<\/span>$ 7,602Double line<\/span><\/td>\r\nSingle line<\/span>$ 3,677Double line<\/span><\/td>\r\nSingle line<\/span>$ 47Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nYou can see there is a lot of information here, but just looking at the bottom line without any statistical analysis, we can see that Net Income has been decreasing. In fact, using 2017 as a baseline, we can see that Net Income from Continuing Operations decreased by $3.933 billion from 2017 to 2018, a decrease of 51.56%, and then decreased again from $3.695 billion in 2018 to a measly $84 million in 2019. That\u2019s a decrease of 97.73% from 2018 to 2019, and a decrease of 98.9% from 2017 to 2019.\r\n\r\n\"AIt\u2019s fairly easy to see that Pretax Income dropped in half (a 50% reduction) from 2017 to 2018 and then by more than 100% from 2018 to 2019 (from $4.345 billion to a loss of $640 million).\r\n\r\nInterestingly, if we go look at operating expenses, we see them fairly stable at just under $20 billion for each year. Revenue was declining, but not dramatically (well, I suppose a drop of a billion dollars from 2017 to 2019 could be dramatic if you just look at the nominal drop, but it\u2019s only a drop of 0.56%, which is about half a percent).\r\n\r\nWe see the cost of goods sold going up slightly, and the combination of declining sales and the increasing cost of goods and services is driving the overall gross profit down, which is affecting operating income. The other significant item that changed between 2018 and 2019 was Other Income\/Expense, Non-Operating, which went from an income item of $2.821 billion in 2018 to an expense of $1.115 billion in 2019. Some digging into the disclosure section of Ford's annual report<\/a> (specifically Note 5 on page FS-20), along with press releases and other public information, reveals that Ford recalculated it\u2019s defined benefit pension plan costs and, under GAAP, recognized an additional expense of almost $2 billion in 2019 for that line item that was previously showing as an income source (likely due to higher-than-expected market returns).\r\n\r\nThe point is that a horizontal analysis like this can reveal trends and hot spots that need more research.\r\n\r\nLet\u2019s look at the exact same data in a common size format. This is essentially a combination of an intracompany vertical and a horizontal analysis:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Ford Motor Company<\/th>\r\n2017<\/th>\r\n2018<\/th>\r\n2019<\/th>\r\n<\/tr>\r\n<\/thead>\r\n
Total Revenue<\/th>\r\n100.00%<\/td>\r\n100.00%<\/td>\r\n100.00%<\/td>\r\n<\/tr>\r\n
Cost of Goods and Services<\/th>\r\n83.76%<\/td>\r\n84.99%<\/td>\r\n86.40%<\/td>\r\n<\/tr>\r\n
Gross Profit<\/th>\r\nSingle line<\/span>16.24%<\/td>\r\nSingle line<\/span>15.01%<\/td>\r\nSingle line<\/span>13.60%<\/td>\r\n<\/tr>\r\n
Subcategory, <\/span>Operating Expenses<\/strong><\/td>\r\nSingle line<\/span><\/td>\r\nSingle line<\/span><\/td>\r\nSingle line<\/span><\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Selling, General and Administrative Expenses<\/th>\r\n7.35%<\/td>\r\n7.11%<\/td>\r\n7.16%<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Other Income\/Expense, Operating<\/th>\r\n5.77%<\/td>\r\n5.90%<\/td>\r\n6.08%<\/td>\r\n<\/tr>\r\n
Total Operating Expenses<\/th>\r\nSingle line<\/span>13.12%<\/td>\r\nSingle line<\/span>13.01%<\/td>\r\nSingle line<\/span>13.23%<\/td>\r\n<\/tr>\r\n
Total Operating Profit\/Loss<\/th>\r\nSingle line<\/span>3.11%<\/td>\r\nSingle line<\/span>2.00%<\/td>\r\nSingle line<\/span>0.37%<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/tr>\r\n
Subcategory, <\/span>Non-Operating Income\/Expenses, Total<\/strong><\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Interest Expense Net of Capitalized Interest<\/th>\r\n-0.76%<\/td>\r\n-0.77%<\/td>\r\n-0.67%<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Interest Income<\/th>\r\n0.29%<\/td>\r\n0.44%<\/td>\r\n0.52%<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Gain\/Loss on Investments and Other Financial Instruments<\/th>\r\n-0.01%<\/td>\r\n0.07%<\/td>\r\n0.09%<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Share of Profit and Interest from Associates<\/th>\r\n0.77%<\/td>\r\n0.10%<\/td>\r\n0.03%<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Gain\/Loss on Extinguishment of Debt<\/th>\r\n0.00%<\/td>\r\n0.00%<\/td>\r\n-0.04%<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Other Income\/Expense, Non-Operating<\/th>\r\n1.80%<\/td>\r\n0.87%<\/td>\r\n-0.72%<\/td>\r\n<\/tr>\r\n
Pretax Income<\/th>\r\nSingle line<\/span>5.20%<\/td>\r\nSingle line<\/span>2.71%<\/td>\r\nSingle line<\/span>-0.41%<\/td>\r\n<\/tr>\r\n
Provision for Income Tax<\/th>\r\n-0.26%<\/td>\r\n-0.41%<\/td>\r\n0.46%<\/td>\r\n<\/tr>\r\n
Net Income from Continuing Operations<\/th>\r\n4.95%<\/td>\r\n2.30%<\/td>\r\n0.05%<\/td>\r\n<\/tr>\r\n
Non-Controlling\/Minority Interests<\/th>\r\n-0.02%<\/td>\r\n-0.01%<\/td>\r\n-0.02%<\/td>\r\n<\/tr>\r\n
Net Income after Non-Controlling\/Minority Interests<\/th>\r\nSingle line<\/span>4.93%Double line<\/span><\/td>\r\nSingle line<\/span>2.29%Double line<\/span><\/td>\r\nSingle line<\/span>0.03%Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nYou can see the gross profit percentage declining, as cost of goods sold as a percentage of sales increases:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Ford Motor Company<\/th>\r\n2017<\/th>\r\n2018<\/th>\r\n2019<\/th>\r\n<\/tr>\r\n<\/thead>\r\n
Total Revenue<\/th>\r\n100.00%<\/td>\r\n100.00%<\/td>\r\n100.00%<\/td>\r\n<\/tr>\r\n
Cost of Goods and Services<\/th>\r\n83.76%<\/td>\r\n84.99%<\/td>\r\n86.40%<\/td>\r\n<\/tr>\r\n
Gross Profit<\/th>\r\n16.24%<\/td>\r\n15.01%<\/td>\r\n13.60%<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nFor every dollar in sales in 2017, the product cost was about 84 cents, and by 2019 the product cost for every dollar in sales had gone up to 86 cents, driving the margin down to about 14 cents per dollar.\r\n\r\nAlthough operating expenses as a percentage of sales stayed fairly constant, the increased cost of goods sold drove the already thin operating margin down from 3 cents on the dollar to almost zero.\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Ford Motor Company<\/th>\r\n2017<\/th>\r\n2018<\/th>\r\n2019<\/th>\r\n<\/tr>\r\n<\/thead>\r\n
Subcategory, <\/span>Operating Expenses<\/strong><\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Selling, General and Administrative Expenses<\/th>\r\n7.35%<\/td>\r\n7.11%<\/td>\r\n7.16%<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Other Income\/Expense, Operating<\/th>\r\n5.77%<\/td>\r\n5.90%<\/td>\r\n6.08%<\/td>\r\n<\/tr>\r\n
Total Operating Expenses<\/th>\r\n13.12%<\/td>\r\n13.01%<\/td>\r\n13.23%<\/td>\r\n<\/tr>\r\n
Total Operating Profit\/Loss<\/th>\r\n3.11%<\/td>\r\n2.00%<\/td>\r\n0.37%<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nBefore we look at the balance sheet, note that Ford publishes some of its metrics on the company website<\/a>:\r\n\r\n[caption id=\"attachment_6128\" align=\"aligncenter\" width=\"1024\"]\"See See the Ford's financial highlights long description<\/a> here.[\/caption]\r\n\r\nWe could (and should) check these against the audited financials, but since they are easily verified, it\u2019s likely the company is not inflating or deflating any of these measures.\r\n\r\nWe can see that revenue numbers agree with the income statement we downloaded, but we would have to do more research to find out how the company came up with \u201cadjusted\u201d free cash flow and \u201cadjusted\u201d EBIT (earnings before income tax). There is a footnote on that page that states, \u201cReconciliations of the non-GAAP financial measures designated as \u201cadjusted\u201d to the most comparable financial measures calculated in accordance with U.S. generally accepted accounting principles (\u201cGAAP\u201d) can be found on pages 62 and 63 of Ford's 2019 printed annual report<\/a>.\r\n\r\n[caption id=\"attachment_6130\" align=\"aligncenter\" width=\"1024\"]\"See See the balance sheet long description<\/a> here.[\/caption]\r\n\r\nLet\u2019s take a look at assets from the annual report:\r\n\r\nFrom this information, we could calculate inventory turnover for 2019:\r\n

[latex]\\dfrac{\\text{Cost of Goods Sold}}{\\text{Average Inventory}}=\\dfrac{134,693,000,000}{\\frac{11,220,000,000 + 10,786,000,000}{2}}[\/latex]<\/p>\r\nIt\u2019s easier to drop all of those zeros, so\r\n

[latex]\\dfrac{134,693}{\\frac{22,006}{2}}=\\dfrac{134,693}{\\frac{11,220+10,786}{2}}=\\dfrac{134,693}{11,003}=12.24[\/latex]<\/p>\r\nInventory turns over 12.24 times per year, or about once a month [latex]\\left(\\dfrac{365}{12.24}=29.82\\text{ days}\\right)[\/latex].\r\n\r\nFor comparison, let\u2019s compute the same metric for General Motors (GM) for 2019<\/a>.\r\n

GM\u2019s Cost of Goods Sold = 110,651 million<\/p>\r\n

Average inventory = [latex]\\dfrac{10,398 + 9,816}{2}[\/latex](in millions)<\/p>\r\n

Therefore, inventory turnover =[latex]\\dfrac{110,651}{10,107}= 10.95[\/latex]<\/p>\r\n

[latex]\\dfrac{365}{10.95}=33.33\\text{ days}[\/latex]<\/p>\r\nBased on just this analysis, it would appear that Ford is more efficient at moving inventory than GM, but not by much. In essence, both companies only hold inventory (including work in process) for about a month.\r\n\r\nAssuming that most of Ford\u2019s sales are credit, accounts receivable turnover for Ford for 2019 = Net Credit Sales \/ Average Accounts Receivable = 155,900 \/ [(11,195 + 9,237)] = 15.26.\r\n\r\nAccounts receivable turn over 15.26 times per year, which is once every 24 days (365\/15.26).\r\n\r\nThe same metric for GM for 2019 = 18.39 times, or just about 20 days, so GM is a bit faster at collecting accounts than Ford.\r\n\r\nIf we add liabilities into the picture, we can calculate working capital and the associated current quick ratios:\r\n\r\n[caption id=\"attachment_6134\" align=\"aligncenter\" width=\"1024\"]\"See See the balance sheet long description<\/a> here.[\/caption]\r\n\r\nWorking capital at the end of 2019 = current assets - current liabilities:\r\n\r\n$114,047 (million) - $98,132 (million) = $15,915 million in working capital, and the current ratio would be 114\/98 = 1.16 which means the company had $1.16 in current assets for every dollar in current liabilities. Excluding inventory from the calculation gives us a quick ratio of (114,047 - 10,786) \/ 98,132 = 1.05, still more than a 1:1 ratio.\r\n\r\nThe debt to assets ratio would be 225,307\/258,537, just slightly less than 1:1. Just looking at the numbers, we see that most of the assets are debt-financed. In fact, using the accounting equation, we would expect shareholders\u2019 equity to be 258,537 (assets) - 225,307 (liabilities) = 33,230.\r\n\r\nIn fact:\r\n\r\n[caption id=\"attachment_6135\" align=\"aligncenter\" width=\"1024\"]\"See See the balance sheet long description<\/a> here.[\/caption]\r\n\r\nOwner\u2019s equity, as predicted, is $33,230 million.\r\n\r\nAlthough we can see there were 4.011 billion shares of stock issued as of December 31, 2019, we can\u2019t calculate Earnings Per Share because we don\u2019t know the shares outstanding. However, if we trust the auditors who have issued an opinion on these statements, we can find the EPS on the bottom of the income statement on the same page and the basis for the calculation in Note 8 on page FS-25 of the annual report, as well as an explanation of Class A and Class B stock.\r\n\r\n[caption id=\"attachment_6137\" align=\"aligncenter\" width=\"1024\"]\"See See the statement long description<\/a> here.[\/caption]\r\n\r\nOn your own, feel free to explore these financial statements and ratios in more detail. You can calculate and compare debt to equity, return on owners\u2019 equity, return on assets, dividend payout ratio (from the statement of retained earnings on page FS-8), and a host of other ratios. You could also perform a horizontal analysis between Ford and GM, or even between diverse companies such as Ford and Home Depot.\r\n\r\nDepending on how deep you want to dive, and how serious you are, there are services for which you pay, like Dun & Bradstreet and Reuters that provide current industry averages. Also, there is information widely available through a brokerage or even sites like finance.yahoo.com that can provide comparative information, such as this:[footnote]Auto Manufacturers\u2014Major<\/a>, Yahoo! Finance.[\/footnote]\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Automobile Companies' Stock Information<\/caption>\r\n
Symbol<\/th>\r\nName<\/th>\r\nPrice (Intraday)<\/th>\r\nChange<\/th>\r\n%Change<\/th>\r\nVolume<\/th>\r\nAvg Volume (3 months)<\/th>\r\nMarket Cap<\/th>\r\nPE Ratio (TTM)<\/th>\r\n<\/tr>\r\n<\/thead>\r\n
TSLA<\/th>\r\nTesla, Inc.<\/td>\r\n444.10<\/td>\r\n+10.10<\/td>\r\n+2.33%<\/td>\r\n24.053M<\/td>\r\n76.507M<\/td>\r\n413.574B<\/td>\r\n1,149.84<\/td>\r\n<\/tr>\r\n
TM<\/th>\r\nToyota Motor Corporation<\/td>\r\n131.88<\/td>\r\n\u22120.20<\/td>\r\n\u22120.15%<\/td>\r\n83.504k<\/td>\r\n168,096<\/td>\r\n183.432B<\/td>\r\n8.06<\/td>\r\n<\/tr>\r\n
GM<\/th>\r\nGeneral Motors Company<\/td>\r\n32.42<\/td>\r\n+0.26<\/td>\r\n+0.81%<\/td>\r\n3.932M<\/td>\r\n14.13M<\/td>\r\n46.468B<\/td>\r\n30.69<\/td>\r\n<\/tr>\r\n
HMC<\/th>\r\nHonda Motor C, Ltd.<\/td>\r\n24.12<\/td>\r\n\u22120.26<\/td>\r\n\u22121.07%<\/td>\r\n312.519k<\/td>\r\n661.832<\/td>\r\n41.617B<\/td>\r\n4.16<\/td>\r\n<\/tr>\r\n
RACE<\/th>\r\nFerrari N.V.<\/td>\r\n184.73<\/td>\r\n+1.89<\/td>\r\n+1.03%<\/td>\r\n92.868k<\/td>\r\n190,260<\/td>\r\n45.665B<\/td>\r\n41.19<\/td>\r\n<\/tr>\r\n
F<\/th>\r\nFord Motor Company<\/td>\r\n7.68<\/td>\r\n+0.43<\/td>\r\n+5.98%<\/td>\r\n71.759M<\/td>\r\n62.032M<\/td>\r\n0.603B<\/td>\r\nN\/A<\/td>\r\n<\/tr>\r\n
NIO<\/th>\r\nNIO Limited<\/td>\r\n21.67<\/td>\r\n+0.20<\/td>\r\n+0.93%<\/td>\r\n33.483M<\/td>\r\n108.573M<\/td>\r\n26.47B<\/td>\r\nN\/A<\/td>\r\n<\/tr>\r\n
FCAU<\/th>\r\nFiat Chrysler Automobiles N.V.<\/td>\r\n12.55<\/td>\r\n+0.06<\/td>\r\n+0.44%<\/td>\r\n929.511k<\/td>\r\n2.422M<\/td>\r\n25.418B<\/td>\r\n5.42<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nNotice that Tesla stock was trading at almost 1150 times earnings, while Toyota and Honda were trading in the single digits. Ford\u2019s P\/E ratio is not being calculated because the earnings are too low, but we could take our most current EPS of $0.01 and divide the price of 7.68 by that amount to get a P\/E of 768.\r\n\r\nIn the above analysis presented by Yahoo Finance, you\u2019ll see the P\/E ratio is being calculated in real time on a Trailing 12 months (TTM) basis. TTM uses the past 12 consecutive months of a company's performance data to report financial figures. The 12 months studied do not necessarily coincide with a fiscal-year ending period.\r\n\r\nObviously, there is much more to financial analysis than can be covered in one module, but the information presented here will give you a good start and a basis for educating yourself about what is possible and will make you a better manager and investor.","rendered":"

The following summarized financial statements for Ford Motor Company<\/a> were downloaded from Morningstar into an Excel spreadsheet and then reformatted slightly and double checked against the audited financial statements:<\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Ford Motor Company<\/th>\n2017<\/th>\n2018<\/th>\n2019<\/th>\n<\/tr>\n<\/thead>\n
in millions<\/td>\n<\/tr>\n
Total Revenue<\/th>\n$ 156,776<\/td>\n$ 160,338<\/td>\n$ 155,900<\/td>\n<\/tr>\n
Cost of Goods and Services<\/th>\n131,322<\/td>\n136,269<\/td>\n134,693<\/td>\n<\/tr>\n
Gross Profit<\/th>\nSingle line<\/span>25,454<\/td>\nSingle line<\/span>24,069<\/td>\nSingle line<\/span>21,207<\/td>\n<\/tr>\n
Subcategory, <\/span>Operating Expenses<\/strong><\/td>\nSingle line<\/span><\/td>\nSingle line<\/span><\/td>\nSingle line<\/span><\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Selling, General and Administrative Expenses<\/th>\n11,527<\/td>\n11,403<\/td>\n11,161<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Other Income\/Expense, Operating<\/th>\n9,114<\/td>\n9,463<\/td>\n9,472<\/td>\n<\/tr>\n
Total Operating Expenses<\/th>\nSingle line<\/span>20,641<\/td>\nSingle line<\/span>20,866<\/td>\nSingle line<\/span>20,633<\/td>\n<\/tr>\n
Total Operating Profit\/Loss<\/th>\nSingle line<\/span>4,813<\/td>\nSingle line<\/span>3,203<\/td>\nSingle line<\/span>574<\/td>\n<\/tr>\n
<\/td>\n<\/tr>\n
Subcategory, <\/span>Non-Operating Income\/Expenses, Total<\/strong><\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Interest Expense Net of Capitalized Interest<\/th>\n(1,133)<\/td>\n(1,228)<\/td>\n(1,049)<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Interest Income<\/th>\n461<\/td>\n700<\/td>\n809<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Gain\/Loss on Investments and Other Financial Instruments<\/th>\n(22)<\/td>\n115<\/td>\n144<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Share of Profit and Interest from Associates<\/th>\n1,208<\/td>\n165<\/td>\n52<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Gain\/Loss on Extinguishment of Debt<\/th>\n0<\/td>\n0<\/td>\n(55)<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Other Income\/Expense, Non-Operating<\/th>\n2,821<\/td>\n1,390<\/td>\n(1,115)<\/td>\n<\/tr>\n
Pretax Income<\/th>\nSingle line<\/span>8,148<\/td>\nSingle line<\/span>4,345<\/td>\nSingle line<\/span>(640)<\/td>\n<\/tr>\n
Provision for Income Tax<\/th>\n(520)<\/td>\n(650)<\/td>\n724<\/td>\n<\/tr>\n
Net Income from Continuing Operations<\/th>\nSingle line<\/span>7,628<\/td>\nSingle line<\/span>3,695<\/td>\nSingle line<\/span>84<\/td>\n<\/tr>\n
Non-Controlling\/Minority Interests<\/th>\n(26)<\/td>\n(18)<\/td>\n(37)<\/td>\n<\/tr>\n
Net Income after Non-Controlling\/Minority Interests<\/th>\nSingle line<\/span>$ 7,602Double line<\/span><\/td>\nSingle line<\/span>$ 3,677Double line<\/span><\/td>\nSingle line<\/span>$ 47Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

You can see there is a lot of information here, but just looking at the bottom line without any statistical analysis, we can see that Net Income has been decreasing. In fact, using 2017 as a baseline, we can see that Net Income from Continuing Operations decreased by $3.933 billion from 2017 to 2018, a decrease of 51.56%, and then decreased again from $3.695 billion in 2018 to a measly $84 million in 2019. That\u2019s a decrease of 97.73% from 2018 to 2019, and a decrease of 98.9% from 2017 to 2019.<\/p>\n

\"AIt\u2019s fairly easy to see that Pretax Income dropped in half (a 50% reduction) from 2017 to 2018 and then by more than 100% from 2018 to 2019 (from $4.345 billion to a loss of $640 million).<\/p>\n

Interestingly, if we go look at operating expenses, we see them fairly stable at just under $20 billion for each year. Revenue was declining, but not dramatically (well, I suppose a drop of a billion dollars from 2017 to 2019 could be dramatic if you just look at the nominal drop, but it\u2019s only a drop of 0.56%, which is about half a percent).<\/p>\n

We see the cost of goods sold going up slightly, and the combination of declining sales and the increasing cost of goods and services is driving the overall gross profit down, which is affecting operating income. The other significant item that changed between 2018 and 2019 was Other Income\/Expense, Non-Operating, which went from an income item of $2.821 billion in 2018 to an expense of $1.115 billion in 2019. Some digging into the disclosure section of Ford’s annual report<\/a> (specifically Note 5 on page FS-20), along with press releases and other public information, reveals that Ford recalculated it\u2019s defined benefit pension plan costs and, under GAAP, recognized an additional expense of almost $2 billion in 2019 for that line item that was previously showing as an income source (likely due to higher-than-expected market returns).<\/p>\n

The point is that a horizontal analysis like this can reveal trends and hot spots that need more research.<\/p>\n

Let\u2019s look at the exact same data in a common size format. This is essentially a combination of an intracompany vertical and a horizontal analysis:<\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Ford Motor Company<\/th>\n2017<\/th>\n2018<\/th>\n2019<\/th>\n<\/tr>\n<\/thead>\n
Total Revenue<\/th>\n100.00%<\/td>\n100.00%<\/td>\n100.00%<\/td>\n<\/tr>\n
Cost of Goods and Services<\/th>\n83.76%<\/td>\n84.99%<\/td>\n86.40%<\/td>\n<\/tr>\n
Gross Profit<\/th>\nSingle line<\/span>16.24%<\/td>\nSingle line<\/span>15.01%<\/td>\nSingle line<\/span>13.60%<\/td>\n<\/tr>\n
Subcategory, <\/span>Operating Expenses<\/strong><\/td>\nSingle line<\/span><\/td>\nSingle line<\/span><\/td>\nSingle line<\/span><\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Selling, General and Administrative Expenses<\/th>\n7.35%<\/td>\n7.11%<\/td>\n7.16%<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Other Income\/Expense, Operating<\/th>\n5.77%<\/td>\n5.90%<\/td>\n6.08%<\/td>\n<\/tr>\n
Total Operating Expenses<\/th>\nSingle line<\/span>13.12%<\/td>\nSingle line<\/span>13.01%<\/td>\nSingle line<\/span>13.23%<\/td>\n<\/tr>\n
Total Operating Profit\/Loss<\/th>\nSingle line<\/span>3.11%<\/td>\nSingle line<\/span>2.00%<\/td>\nSingle line<\/span>0.37%<\/td>\n<\/tr>\n
<\/td>\n<\/tr>\n
Subcategory, <\/span>Non-Operating Income\/Expenses, Total<\/strong><\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Interest Expense Net of Capitalized Interest<\/th>\n-0.76%<\/td>\n-0.77%<\/td>\n-0.67%<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Interest Income<\/th>\n0.29%<\/td>\n0.44%<\/td>\n0.52%<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Gain\/Loss on Investments and Other Financial Instruments<\/th>\n-0.01%<\/td>\n0.07%<\/td>\n0.09%<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Share of Profit and Interest from Associates<\/th>\n0.77%<\/td>\n0.10%<\/td>\n0.03%<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Gain\/Loss on Extinguishment of Debt<\/th>\n0.00%<\/td>\n0.00%<\/td>\n-0.04%<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Other Income\/Expense, Non-Operating<\/th>\n1.80%<\/td>\n0.87%<\/td>\n-0.72%<\/td>\n<\/tr>\n
Pretax Income<\/th>\nSingle line<\/span>5.20%<\/td>\nSingle line<\/span>2.71%<\/td>\nSingle line<\/span>-0.41%<\/td>\n<\/tr>\n
Provision for Income Tax<\/th>\n-0.26%<\/td>\n-0.41%<\/td>\n0.46%<\/td>\n<\/tr>\n
Net Income from Continuing Operations<\/th>\n4.95%<\/td>\n2.30%<\/td>\n0.05%<\/td>\n<\/tr>\n
Non-Controlling\/Minority Interests<\/th>\n-0.02%<\/td>\n-0.01%<\/td>\n-0.02%<\/td>\n<\/tr>\n
Net Income after Non-Controlling\/Minority Interests<\/th>\nSingle line<\/span>4.93%Double line<\/span><\/td>\nSingle line<\/span>2.29%Double line<\/span><\/td>\nSingle line<\/span>0.03%Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

You can see the gross profit percentage declining, as cost of goods sold as a percentage of sales increases:<\/p>\n\n\n\n\n\n\n\n
Ford Motor Company<\/th>\n2017<\/th>\n2018<\/th>\n2019<\/th>\n<\/tr>\n<\/thead>\n
Total Revenue<\/th>\n100.00%<\/td>\n100.00%<\/td>\n100.00%<\/td>\n<\/tr>\n
Cost of Goods and Services<\/th>\n83.76%<\/td>\n84.99%<\/td>\n86.40%<\/td>\n<\/tr>\n
Gross Profit<\/th>\n16.24%<\/td>\n15.01%<\/td>\n13.60%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

For every dollar in sales in 2017, the product cost was about 84 cents, and by 2019 the product cost for every dollar in sales had gone up to 86 cents, driving the margin down to about 14 cents per dollar.<\/p>\n

Although operating expenses as a percentage of sales stayed fairly constant, the increased cost of goods sold drove the already thin operating margin down from 3 cents on the dollar to almost zero.<\/p>\n\n\n\n\n\n\n\n\n\n
Ford Motor Company<\/th>\n2017<\/th>\n2018<\/th>\n2019<\/th>\n<\/tr>\n<\/thead>\n
Subcategory, <\/span>Operating Expenses<\/strong><\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Selling, General and Administrative Expenses<\/th>\n7.35%<\/td>\n7.11%<\/td>\n7.16%<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Other Income\/Expense, Operating<\/th>\n5.77%<\/td>\n5.90%<\/td>\n6.08%<\/td>\n<\/tr>\n
Total Operating Expenses<\/th>\n13.12%<\/td>\n13.01%<\/td>\n13.23%<\/td>\n<\/tr>\n
Total Operating Profit\/Loss<\/th>\n3.11%<\/td>\n2.00%<\/td>\n0.37%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Before we look at the balance sheet, note that Ford publishes some of its metrics on the company website<\/a>:<\/p>\n

\"See<\/p>\n

See the Ford’s financial highlights long description<\/a> here.<\/p>\n<\/div>\n

We could (and should) check these against the audited financials, but since they are easily verified, it\u2019s likely the company is not inflating or deflating any of these measures.<\/p>\n

We can see that revenue numbers agree with the income statement we downloaded, but we would have to do more research to find out how the company came up with \u201cadjusted\u201d free cash flow and \u201cadjusted\u201d EBIT (earnings before income tax). There is a footnote on that page that states, \u201cReconciliations of the non-GAAP financial measures designated as \u201cadjusted\u201d to the most comparable financial measures calculated in accordance with U.S. generally accepted accounting principles (\u201cGAAP\u201d) can be found on pages 62 and 63 of Ford’s 2019 printed annual report<\/a>.<\/p>\n

\"See<\/p>\n

See the balance sheet long description<\/a> here.<\/p>\n<\/div>\n

Let\u2019s take a look at assets from the annual report:<\/p>\n

From this information, we could calculate inventory turnover for 2019:<\/p>\n

[latex]\\dfrac{\\text{Cost of Goods Sold}}{\\text{Average Inventory}}=\\dfrac{134,693,000,000}{\\frac{11,220,000,000 + 10,786,000,000}{2}}[\/latex]<\/p>\n

It\u2019s easier to drop all of those zeros, so<\/p>\n

[latex]\\dfrac{134,693}{\\frac{22,006}{2}}=\\dfrac{134,693}{\\frac{11,220+10,786}{2}}=\\dfrac{134,693}{11,003}=12.24[\/latex]<\/p>\n

Inventory turns over 12.24 times per year, or about once a month [latex]\\left(\\dfrac{365}{12.24}=29.82\\text{ days}\\right)[\/latex].<\/p>\n

For comparison, let\u2019s compute the same metric for General Motors (GM) for 2019<\/a>.<\/p>\n

GM\u2019s Cost of Goods Sold = 110,651 million<\/p>\n

Average inventory = [latex]\\dfrac{10,398 + 9,816}{2}[\/latex](in millions)<\/p>\n

Therefore, inventory turnover =[latex]\\dfrac{110,651}{10,107}= 10.95[\/latex]<\/p>\n

[latex]\\dfrac{365}{10.95}=33.33\\text{ days}[\/latex]<\/p>\n

Based on just this analysis, it would appear that Ford is more efficient at moving inventory than GM, but not by much. In essence, both companies only hold inventory (including work in process) for about a month.<\/p>\n

Assuming that most of Ford\u2019s sales are credit, accounts receivable turnover for Ford for 2019 = Net Credit Sales \/ Average Accounts Receivable = 155,900 \/ [(11,195 + 9,237)] = 15.26.<\/p>\n

Accounts receivable turn over 15.26 times per year, which is once every 24 days (365\/15.26).<\/p>\n

The same metric for GM for 2019 = 18.39 times, or just about 20 days, so GM is a bit faster at collecting accounts than Ford.<\/p>\n

If we add liabilities into the picture, we can calculate working capital and the associated current quick ratios:<\/p>\n

\"See<\/p>\n

See the balance sheet long description<\/a> here.<\/p>\n<\/div>\n

Working capital at the end of 2019 = current assets – current liabilities:<\/p>\n

$114,047 (million) – $98,132 (million) = $15,915 million in working capital, and the current ratio would be 114\/98 = 1.16 which means the company had $1.16 in current assets for every dollar in current liabilities. Excluding inventory from the calculation gives us a quick ratio of (114,047 – 10,786) \/ 98,132 = 1.05, still more than a 1:1 ratio.<\/p>\n

The debt to assets ratio would be 225,307\/258,537, just slightly less than 1:1. Just looking at the numbers, we see that most of the assets are debt-financed. In fact, using the accounting equation, we would expect shareholders\u2019 equity to be 258,537 (assets) – 225,307 (liabilities) = 33,230.<\/p>\n

In fact:<\/p>\n

\"See<\/p>\n

See the balance sheet long description<\/a> here.<\/p>\n<\/div>\n

Owner\u2019s equity, as predicted, is $33,230 million.<\/p>\n

Although we can see there were 4.011 billion shares of stock issued as of December 31, 2019, we can\u2019t calculate Earnings Per Share because we don\u2019t know the shares outstanding. However, if we trust the auditors who have issued an opinion on these statements, we can find the EPS on the bottom of the income statement on the same page and the basis for the calculation in Note 8 on page FS-25 of the annual report, as well as an explanation of Class A and Class B stock.<\/p>\n

\"See<\/p>\n

See the statement long description<\/a> here.<\/p>\n<\/div>\n

On your own, feel free to explore these financial statements and ratios in more detail. You can calculate and compare debt to equity, return on owners\u2019 equity, return on assets, dividend payout ratio (from the statement of retained earnings on page FS-8), and a host of other ratios. You could also perform a horizontal analysis between Ford and GM, or even between diverse companies such as Ford and Home Depot.<\/p>\n

Depending on how deep you want to dive, and how serious you are, there are services for which you pay, like Dun & Bradstreet and Reuters that provide current industry averages. Also, there is information widely available through a brokerage or even sites like finance.yahoo.com that can provide comparative information, such as this:[1]<\/sup><\/a><\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n
Automobile Companies’ Stock Information<\/caption>\n
Symbol<\/th>\nName<\/th>\nPrice (Intraday)<\/th>\nChange<\/th>\n%Change<\/th>\nVolume<\/th>\nAvg Volume (3 months)<\/th>\nMarket Cap<\/th>\nPE Ratio (TTM)<\/th>\n<\/tr>\n<\/thead>\n
TSLA<\/th>\nTesla, Inc.<\/td>\n444.10<\/td>\n+10.10<\/td>\n+2.33%<\/td>\n24.053M<\/td>\n76.507M<\/td>\n413.574B<\/td>\n1,149.84<\/td>\n<\/tr>\n
TM<\/th>\nToyota Motor Corporation<\/td>\n131.88<\/td>\n\u22120.20<\/td>\n\u22120.15%<\/td>\n83.504k<\/td>\n168,096<\/td>\n183.432B<\/td>\n8.06<\/td>\n<\/tr>\n
GM<\/th>\nGeneral Motors Company<\/td>\n32.42<\/td>\n+0.26<\/td>\n+0.81%<\/td>\n3.932M<\/td>\n14.13M<\/td>\n46.468B<\/td>\n30.69<\/td>\n<\/tr>\n
HMC<\/th>\nHonda Motor C, Ltd.<\/td>\n24.12<\/td>\n\u22120.26<\/td>\n\u22121.07%<\/td>\n312.519k<\/td>\n661.832<\/td>\n41.617B<\/td>\n4.16<\/td>\n<\/tr>\n
RACE<\/th>\nFerrari N.V.<\/td>\n184.73<\/td>\n+1.89<\/td>\n+1.03%<\/td>\n92.868k<\/td>\n190,260<\/td>\n45.665B<\/td>\n41.19<\/td>\n<\/tr>\n
F<\/th>\nFord Motor Company<\/td>\n7.68<\/td>\n+0.43<\/td>\n+5.98%<\/td>\n71.759M<\/td>\n62.032M<\/td>\n0.603B<\/td>\nN\/A<\/td>\n<\/tr>\n
NIO<\/th>\nNIO Limited<\/td>\n21.67<\/td>\n+0.20<\/td>\n+0.93%<\/td>\n33.483M<\/td>\n108.573M<\/td>\n26.47B<\/td>\nN\/A<\/td>\n<\/tr>\n
FCAU<\/th>\nFiat Chrysler Automobiles N.V.<\/td>\n12.55<\/td>\n+0.06<\/td>\n+0.44%<\/td>\n929.511k<\/td>\n2.422M<\/td>\n25.418B<\/td>\n5.42<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Notice that Tesla stock was trading at almost 1150 times earnings, while Toyota and Honda were trading in the single digits. Ford\u2019s P\/E ratio is not being calculated because the earnings are too low, but we could take our most current EPS of $0.01 and divide the price of 7.68 by that amount to get a P\/E of 768.<\/p>\n

In the above analysis presented by Yahoo Finance, you\u2019ll see the P\/E ratio is being calculated in real time on a Trailing 12 months (TTM) basis. TTM uses the past 12 consecutive months of a company’s performance data to report financial figures. The 12 months studied do not necessarily coincide with a fiscal-year ending period.<\/p>\n

Obviously, there is much more to financial analysis than can be covered in one module, but the information presented here will give you a good start and a basis for educating yourself about what is possible and will make you a better manager and investor.<\/p>\n\n\t\t\t

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Candela Citations<\/h3>\n\t\t\t\t\t
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