final business report - course project

Running head: Financial analysis of Companies 1

Company chosen for the analysis are Ford Motor Company and General Motor Company

Liquidity ratio

Current ratio /Quick ratio-Current ratio of 7.18 and quick ratio of 6.77 of Ford Motor Company indicate the higher level of liquidity whereas the Current ratio of 1.09 and quick ratio of 0.84 of General Motor Company indicate that it is less liquid than the Ford Motor Company.

Activity ratio

1. Inventory turnover – Inventory turnover ratio of Ford Motor Company is 15.2 whereas for

General Motor Company is 9.7 indicates that General motor Company not managing its inventory effectively and company liquidity is highly tied up with its inventories than the Ford Motor Company.

2. Receivable turnover /Days of sales of outstanding – Receivable turnover ratio of Ford Motor Company is 1.5 and Days of sales of outstanding is 248.9 whereas for General Motor Company Receivable turnover ratio is 4.4 and Days of sales of outstanding is 83.8 indicates that credit policy of Ford motor company is very lenient and thus collection procedures is not effectively managed than General Motor company because of higher Days of sales of outstanding or lower Receivable turnover ratio.

3. Fixed asset turnover/Total asset turnover - Fixed asset turnover ratio is 1.9 and Total asset turnover ratio is 0.7 for Ford Motor Company whereas for General Motor Company Fixed asset turnover ratio is 1.3 and Total asset turnover ratio is 0.8 indicates that difference in ratio of two companies is due to the fixed assets. Also, since fixed asset turnover of Ford Motor Company is greater than fixed asset turnover of General Motor Company indicate that the Ford Motor company has efficiently using the assets to generate the revenues than General Motor Company.

However, both companies ratios is below par than the Industry standard indicates companies not efficiently using the assets to generate revenues and thus it is the indication of operating inefficiency. There may be no of reasons for that like companies assets are newer, capital intensive business environment.

Profitability ratios

1. Gross Profit/Operating Profit- Gross Profit is 15.4% and Operating Profit is 5.1% for Ford Motor Company whereas for General Motor Company Gross Profit is 12% and Operating Profit is 3.2% indicates the following points

a) Gross profit margin of Ford Motor Company is greater than Gross profit margin of General Motor Company because of lower cost of goods sold even though the sales of General Motor Company is higher than sales of Ford Motor Company.

b) Operating profit margin of Ford Motor Company is greater than Operating profit margin of General Motor Company because of lower cost of goods sold because selling and administrative expense and Non-recurring expense of Ford Motor Company is greater than selling and administrative expense and Non-recurring expense of Ford Motor Company. Difference is there is due to difference in Gross Profit only.

2. Net Profit margin-Net Profit margin is 4.9% for Ford Motor Company whereas for General Motor Company it is 6.4% , this came as a surprise because operating profit margin of Ford Motor Company is greater than operating profit margin of General Motor Company, however difference is because Ford Motor Company adding the income tax rather than subtracting it from the Earnings before taxes

a) Gross profit margin of Ford Motor Company is greater than Gross profit margin of General Motor Company because of lower cost of goods sold even though the sales of General Motor Company is higher than sales of Ford Motor Company.

b) Operating profit margin of Ford Motor Company is greater than Operating profit margin of General Motor Company because of lower cost of goods sold because selling and administrative expense and Non-recurring expense of Ford Motor Company is greater

3. Return on assets- Return on assets which measures the return earned by the company on its assets is 3.3% for Ford Motor Company and 5.0% for General Motor Company, indicates that income generated by General Motor Company given its total assets is higher than income generated by General Motor Company given its total assets.

4. Return on Equity- Return on equity which measures the return earned by the company on its equity capital is 25.7% for Ford Motor Company and 24.3% for General Motor Company, indicates that income generated by General Motor Company given its equity capital is higher than income generated by General Motor Company given its equity capital.

Leverage ratio

1. Debt Net worth- Debt to Net worth ratio or Debt to equity ratio is 5.3 for Ford Motor Company and 2 for General Motor Company, indicates that financial risk is more in the Ford Motor Company as there is there is more debt in its capital Structure than the capital Structure of General Motor Company.

2. Debt ratio- Debt ratio is 0.68 for Ford Motor Company and 0.41 for General Motor Company indicate that the 68% of Ford Motor Company assets is financed by debt whereas the 41% of General Motor Company assets is financed by debt so financial risk is more in the Ford Motor Company which is also indicated by the higher Debt Net worth ratio of Ford Motor Company.

Coverage ratio

Times interest earned - Times interest earned or Interest coverage ratio is 14.3 for Ford Motor Company and 18.4 for General Motor Company which indicates that the 14.3 times the Ford Motor Company operating earnings covers it annual interest debt obligation whereas 18.4 times the General Motor Company operating earnings covers it annual interest debt obligation. So risk is more in the Ford Motor Company as its ratio is less than the ratio of General Motor Company

References

Financial Reporting analysis (2016 level I CFA program curriculum, volume 3)” (n.d.).

Investopedia.com (2016). Sharper insight. Smarter investing. | Investopedia. In . Retrieved from http://WWW.INVESTOPEDIA.COM