The following summarized financial statements for Ford Motor Company were downloaded from Morningstar into an Excel spreadsheet and then reformatted slightly and double checked against the audited financial statements:

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’s a decrease of 97.73% from 2018 to 2019, and a decrease of 98.9% from 2017 to 2019.

It’s 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).

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’s only a drop of 0.56%, which is about half a percent).

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 (specifically Note 5 on page FS-20), along with press releases and other public information, reveals that Ford recalculated it’s 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).

The point is that a horizontal analysis like this can reveal trends and hot spots that need more research.

Let’s look at the exact same data in a common size format. This is essentially a combination of an intracompany vertical and a horizontal analysis:

You can see the gross profit percentage declining, as cost of goods sold as a percentage of sales increases:

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.

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.

Before we look at the balance sheet, note that Ford publishes some of its metrics on the company website:

See the Ford’s financial highlights long description here.

We could (and should) check these against the audited financials, but since they are easily verified, it’s likely the company is not inflating or deflating any of these measures.

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 “adjusted” free cash flow and “adjusted” EBIT (earnings before income tax). There is a footnote on that page that states, “Reconciliations of the non-GAAP financial measures designated as “adjusted” to the most comparable financial measures calculated in accordance with U.S. generally accepted accounting principles (“GAAP”) can be found on pages 62 and 63 of Ford’s 2019 printed annual report.

Let’s take a look at assets from the annual report:

From this information, we could calculate inventory turnover for 2019:

[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]

It’s easier to drop all of those zeros, so

[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]

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].

For comparison, let’s compute the same metric for General Motors (GM) for 2019.

GM’s Cost of Goods Sold = 110,651 million

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

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

[latex]\dfrac{365}{10.95}=33.33\text{ days}[/latex]

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.

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

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

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.

If we add liabilities into the picture, we can calculate working capital and the associated current quick ratios:

Working capital at the end of 2019 = current assets – current liabilities:

$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.

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’ equity to be 258,537 (assets) – 225,307 (liabilities) = 33,230.

In fact:

Owner’s equity, as predicted, is $33,230 million.

Although we can see there were 4.011 billion shares of stock issued as of December 31, 2019, we can’t calculate Earnings Per Share because we don’t 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.

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’ 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.

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]

Notice that Tesla stock was trading at almost 1150 times earnings, while Toyota and Honda were trading in the single digits. Ford’s 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.

In the above analysis presented by Yahoo Finance, you’ll 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.

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.