FIN 610 Final Project Guidelines and Rubric Overview Counting cash every day is important to all companies. If we want to know if we can pay bills due tomorrow, next week, next month, and so on, we need to know the amount of cash available, including what will be spent and what will be coming in. If there is an excess, what is the best option? Do you sit on the cash, invest it in short-term instruments, or ask for guidance on what to do? In the short term, there needs to be a plan in place to ensure that the cash obligations of a firm are met and the company’s reputation and cooperation with others will not be threatened or interrupted. Developing a short-term plan will help a company successfully achieve its long-term goals. This ongoing process requires continuous attention to detail and an understanding of markets, economy, risk, regulations, technology, society, competition, and political implications. In this project, you will complete a comparative analysis of two publicly traded domestic firms within the same industry. You will select two companies that meet the identified criteria, and your selections will be approved by the instructor. Using what you have learned in the course and your own research, you will assess the broader economic climate and evaluate the working capital of each firm. Then, after determining which company is not adequately performing, you will provide recommendations for performance enhancement. The product of your inquiry and analysis will be compiled into a comparative analysis paper. The project is divided into three milestones, which will be submitted at various points throughout the course to scaffold learning and ensure quality final submissions. These milestones will be submitted in Modules Three, Five, and Seven. The final product will be submitted in Module Nine. In this assignment, you will demonstrate your mastery of the following course outcomes: • • • • Analyze best practices of core cash flow management for the ethical oversight of current assets and liabilities Assess economic climates for their impacts to short-term financial markets and instruments Evaluate working capital options and forecasting tools for their potential to improve cash position and profits Propose short-term financial recommendations that align to firms’ strategic objectives and appropriately manage risk Prompt Which of the two selected firms is better positioned in terms of core cash flow management and the likely impacts of the current economic climate on each firm? How would you advise the firm that is currently performing poorly, in terms of improving its cash position, achieving its strategic objectives, and appropriately managing risk? Specifically, the following critical elements must be addressed: I. II. Background: Describe both of the firms and their management, including their strategic objectives. Provide sufficient detail to support the rest of your analysis. Assessment of the Economic Climate III. IV. A. Assess the current interest rates for their impacts on short-term financial markets and instruments. Cite specific evidence that supports your conclusions. B. Assess the current rate of inflation for its impacts on short-term financial markets and instruments. Cite specific evidence that supports your conclusions. C. Referring to the goal of the Federal Open Market Committee, which is to provide a monetary supply that facilitates constant and moderate expansion of the economy, assess the Federal Reserve’s plans (e.g., the likelihood of changes to monetary policy and/or regulations) for their potential impact on short-term financial markets and instruments. Cite specific evidence that supports your conclusions. D. Examine the ethical (e.g., regulatory, tax) considerations that impact the industry within which your firms operate as a result of Sarbanes-Oxley. To what extent do these realities impact their core cash flow management? Provide specific examples to illustrate. Evaluation of the Firms A. Analyze both companies’ cash flow management practices for the last three fiscal years, including cash, accounts receivables, accounts payable, fixed assets, and inventory. Cite specific examples and figures to illustrate. B. Analyze both companies’ working capital cash flow management practices, including cash, accounts receivables, accounts payables, fixed assets, and inventory. Cite specific examples and figures to illustrate. C. Evaluate both companies’ liquidity. Cite specific examples and figures that support your evaluation. D. Calculate both companies’ financial ratios: 1. Activity ratios, including inventory turnover ratios 2. Debt ratios (financial leverage) 3. Profitability and market ratios E. Using the financial ratio calculations above, identify strengths and weaknesses for each firm, citing specific examples and figures to support your response. Conclusions and Recommendations: Using your evaluation, determine which firm is better performing in terms of short-term financial management. For the firm that is not performing well, make the following recommendations for performance enhancement, supporting each with evidence: A. Indicate which forecasting tools should be used, and defend your claims using specific evidence. B. Propose specific working capital and borrowing options that align to the firm’s strategic objectives. C. Propose specific financial products that align to the firm’s strategic objectives. D. Explain how your recommendations appropriately address each of your identified risks. Running head: FORD AND GM Background and Evaluation of Ford Motors and General Motors Feedback is in the end of the paper Please using it to complete the final milestone 1 FORD AND GM 2 Management and strategic objectives for both companies Ford With headquarters located in Dearborn, Michigan, the company has seen major reforms in management over the last three years, recording a heightened rate of changes in strategic management under Alan Mulally, who introduced the company’s strategy, One Ford Mission (Panmore Institute, 2017). The strategy has caused the said changes in the company’s efforts to align its strategic decision areas to it. Key among these strategic objectives is the ten operations management decisions. The objectives of these strategic decisions include consistency, flexibility and high productivity, locally and globally (Lawrence & Weindling, 1980). The first one is the design of goods and services with an objective of attaining global consistency, a requirement in the company's mission. Secondly, quality management aims at customer satisfaction, the third strategic decision area, process and capacity design aims at achieving Ford's production targets. Under the location, the strategy includes the company's dealership locations worldwide guided by market size. The layout design and strategy aimed at maximizing the efficiency of inputs (labor and materials). The supply chain management aims at smoothening cost-effectiveness in the supply chain. The others include inventory management, scheduling, and maintenance. General Motors Head office is in Detroit, Michigan. Just like Ford motors, GM has stipulated its ten strategic decisions and the objectives of each. The aim of these strategies is to optimize FORD AND GM 3 productivity, operational effectiveness, and overall performance. The company's operations management practices are in line with its mission and vision. While gaining popularity as a manufacturer of vehicles, GM has stipulated the design of goods and services as the first objective in which the OM aims at ensuring that the company’s products are innovative enough to influence costs, quality goals and financial resources (Panmore Institute, 2017). To enable this, the company is the leading automotive innovator with simultaneous innovations conducted in the different parts of the automotive. This is in line with GM’s generic and intensive strategy whose aim is product differentiation and development for global business growth. Secondly, the objective of GM’s quality management strategy I similar to Ford’s, customer satisfaction. GM is popular for its robust quality controls and research and development. GM's process and capacity design objective are to integrate automation so as to enhance business processes, resources, and standards. Location strategy outlines the company's 4Ps marketing mix which emphasizes GM-owned stores in malls for maximum sales personnel productivity. With a robust global supply chain, the strategy that GM has aimed at an efficient and effective supply chain, as stipulated in the GM’s social responsibility and corporate citizenship strategy. Finally, the company’s objective in its maintenance strategy is to enhance resource adequacy and production optimality. An Analysis of the two Companies’ Cash flows management Practices From the annual statements of cash flows, GM, just like Ford Motors seems to be spending cash at a faster rate for the last few years, causing negative operating activities balance. General Motors, though still stable, is burning cash fast to finance operations due to the company's latest financing crisis as indicated by the companies' poor performance in the stocks market. FORD AND GM 4 Table 1.1: Ford’s Cash flows for the last three financial years Amounts in millions of dollars Cash Flow from operating, investing and 12/31/2017 12/31/2016 12/31/2015 Net Income / (Loss) 7,628 4,607 7,371 Depreciation, amortization & depletion 8,453 8,717 7,966 Net change of assets/liabilities 2,898 2,924 2,340 Other operating activities -883 3,544 -1,507 Cash from operating activities 18,096 19,792 16,170 Property and equipment -7,049 -6,992 -7,196 Investments 2,331 -2,074 -513 Other investing activities -14,674 -16,286 -18,453 Net cash from investing activities -19,392 -25,352 -26,162 Issuance of capital stock -131 -145 -129 Payment of debt 5,031 7,164 15,502 Increase/ (decrease) in short-term debt 1,229 3,864 1,646 Payment of dividends -2,585 -3,376 -2,380 Other financing activities -151 -49 -371 Net cash from financing activities 3,394 7,458 14,332 Net change cash & cash equivalents 2,587 1,633 3,515 financing activities Ford motors accrued an increase in annual income in the year 2017 following a backdrop in 2018. Cash from operating activities was overused in the year 2017 leading to a cash outflow of $ 883 million. The company also faced negative cash flows from investing activities also FORD AND GM 5 reduced dividends from $3.3 billion in 2016 to $2.5 billion in 2017. The net change in cash and equivalents in 2017 was less compared to 2015 (Zacks, 2018). Table 1.2: GM Cash flows for the last three financial years Cash Flow from operating, investing and 12/31/2017 12/31/2016 12/31/2015 Net Income / (Loss) 330 9,268 9,615 Depreciation, amortization & depletion 12,261 10,408 8,017 Net change of assets/liabilities -3,015 -438 -1,174 cash from discontinued activities -10 0 0 Other operating activities 7,762 -2,693 -3,900 Cash from operating activities 17, 328 16,545 11,978 Property and equipment -20,966 -26,609 -7,874 Acquisition/disposition of subsidiaries -41 -809 -928 Investments -15, 821 -21,570 -31,795 Other investing activities 9,256 13,345 12,562 Net cash from investing activities -27,572 -35,643 -28, 035 Issuance of capital stock -3,507 -2,500 -3,520 Payment of debt 18,595 21,326 18,423 Increase/ (decrease) in short-term debt -140 798 1,128 Payment of dividends -2,233 -2,368 -2,242 Other financing activities -131 -117 -103 Net cash from financing activities 12,384 17,139 13,638 Net change in cash & cash equivalents 2,688 -2,172 -3,716 financing activities GM had a tremendous decrease in net income for the year 2017 following turbulent trends in its global markets. The poor income figures were as a result of poor cash flow management practices where the company sold assets worth $3 billion dollars in 2017 to finance operating FORD AND GM 6 activities of the business (Zacks, 2018). The data shows an exhaustion of cash coffers to cater for short-term debts facing the company. Funding the businesses for both companies is mainly from shares and loans, something that has seen turbulent times resulting in them exploiting their cash reservoirs to finance operations. Accompanying this is GM’s high credit risk as a result of poor performance in the stocks market. The company’s accounts payables are also affected because the annual financial statements for the last several years show a consistent increase in the company’s external debts. GM has experienced reduced funding and as a result, a negative cash flow in investing activities, taking the biggest blow in 2016 (Zacks, 2018). Ford has also experienced negative cash flows from investing activities for the last three years but the severity has been reducing (Zacks, 2018). The loss of market share for GM's cars has resulted in its biggest cash flow nightmares. Most of which have affected inventory, receivables and supplier base (Stice et al., 2017).of which have affected inventory, receivables and supplier base (Stice et al., 2017). FORD AND GM 7 Reference Lawrence, K. D., & Weindling, J. I. (1980). Multiple goal operations management planning and decision making in a quality control department. In Multiple Criteria Decision Making Theory and Application (pp. 203-217). Springer, Berlin, Heidelberg. Stice, D., Stice, E. K., & Stice, J. D. (2017). Cash Flow Problems Can Kill Profitable Companies. Panmore Institute. (2017, February 5). Ford Motor Company Operations Management, 10 Decisions, Productivity. Retrieved August 4, 2018, from Panmore Institute: http://panmore.com/ford-motor-company-operations-management-10-decisions-areasproductivity Panmore Institute. (2017, June 2). General Motors’ Operations Management: 10 Decisions & Productivity. Retrieved August 4, 2018, from Panmore Institute: http://panmore.com/general-motors-operations-management-10-decisions-productivity Zacks. (2018, August 3). Ford Motor Company (F). Retrieved August 4, 2018, from Zacks: Our Research, Your Success: https://www.zacks.com/stock/quote/F/cash-flow-statements Zacks. (2018, August 3). General Motors (GM). Retrieved August 4, 2018, from Zacks: our research, your success: https://www.zacks.com/stock/quote/GM/cash-flow-statements FORD AND GM Feedback Evaluation of the Firms: Cash Flow: You grouped the second and third sections into one - you need to break that out a little more. In this section, I would like you to really dig into the items that impacted the cash flow from operations. You did a good job describing the flow of cash flow in general, but I would like to see you dig into a little more detail. What was the impact of some of the items that we spoke about in class? AR? AP? Inventory? And how did the change in those items impact the cash flow? Evaluation of the Firms: Working Capital Cash Flow: You again have a solid overview of the working capital, but I would like to see you dig into a little more. Are there any ratios that you can utilize to determine the trends of working capital? Current Ratio? Quick Ratio? Any others? 8 Running head: ECONOMIC CLIMATE 1 Economic climate ECONOMIC CLIMATE 2 Economic climate Interest Rates: An interest rate is an additional charge to an outstanding loan that is expressed as an annual percentage for that particular loan (Ahmad, 2010). These rates are not constant they keep varying now and then. Early in the year, the government decided to hike the federal interest from 1.75% to 2.0%. The interest rates are still expected to increase twice within the year and this is really a big burden for short-term financial instruments especially on those ventures that depend on bank loans to finance their activities. This rise is affecting both consumers and business all over the country. Increase in the interest rate slows down businesses and customers from accessing bank loans. The plans for business to expand or increases their production is also faulted and the managers try to maximize on what their business has in place. These interest rates have also affected the day to day business of General Motors and Ford motors this is because the hike in interest has seen the cost of production to increases. The increase in the interest rate has also affected the rate of money flow as the two companies are experiencing low-income flow as the number of customers has really decreased. Cost of production is the first impact in short-term financial markets and instruments that results from increased cost of the inventory needed for production because of the increasing interest rates. According to General Motors, customers will be expected to pay more for a care because the raw materials needed in manufacturing automobiles are pricier. The unfavorable exchange rates in countries like Argentina and Brazil are not helping because they have cost the company approximately $1 billion this year (Josephs, 2018). The highly priced products are the company’s strategy to offset the impact of the high cost of production. Unlike General Motors, ECONOMIC CLIMATE 3 Ford Motor Company did not consider raising automobile prices as a strategy of managing the increasing cost of production. Instead, the company dropped the poorly performing automobile models like the traditional models of Sedan sold in North America in an effort to boost profit margins and cut costs (Carey, 2018). Low-income flow is another impact in short-term financial markets and instruments affecting General Motors and Ford Motor Company as a result of the increasing interest rates. In the last five years, GM’s financial standing has been worsening despite the fact that their competitors namely Honda and Toyota have a steady cash flow. Their low-income flow can be blamed on their poor market focus and critical connection to creation of cash flow. Historians point out that the financial metrics of GM are less focused on creation and sustainability of positive net cash flow and more focused on increasing market revenue and share (More, 2009). On the other hand, Ford Motors has also recorded low-income flow hence the reason their shares are down by 15% every year. Despite the low share sales the company is offering, their January share sales were low and disappointing for the company (Jacobson, 2018). Capital appreciation in the company is absent despite Ford’s efforts to continue trading. Inflation Rates: The inflation rate is the general increase in prices of goods and services this could happen in a single nation or region. Inflation may be as a result of an increase in demand when the supply is still low or the increase of oil prices as these trickles down to the products on sale. The inflation rate currently stands at 2.9%. This is quite low as finance experts expected that the inflation rate would hit 3% this year despite the constant rate it has been for months now. The inflation rate has been quite stable but the increase on the interest rate may end up stirring ECONOMIC CLIMATE 4 inflation of products as it is expected that the cost of production may go up and that is to mean the cost of products in the market will finally increase leading to inflation. It is evident that the hike in the inflation rate will affect how general motor and ford motors will operate as their will be increased on their inventory cost resulting in increased cost of production. Example early this year ford motors were dropping North American cars except the Ford active and Mustang. This is in an effort of stabilizing its finances in a short term. The increasing rate of inflation from 2.9% is creating a lot of pressure in the market where raw materials like steel are costing more. The average price of Ford Motors automobiles is increasing where the company raised automobile prices twice in 2011. At first, a $130 price increase was introduced per vehicle and another $117 raise was introduced in April 2011. With the launch of new models by the company, these vehicle prices are expected to increase significantly considering that the rate of inflation is still high (Trefis Team, 2011). This is also the case with General Motors where the high rate of inflation is causing detrimental effects in the car industry. Studies show that other than the bad currency exchange and rising cost of materials, numerous safety regulations imposed on new car designs are contributing to the high inflation that is increasing production costs (Renee, 2018). On the other hand, increasing inflation has disrupted company operations. For instance, General Motors Company truck administrative operations that were being undertaken in Detroit featuring Chevrolet, Cadillac, and Pontiac were closed down sold, and others relocated because the company could not keep up with the high cost of operation (Haglund, 2015). Ford motors also blame their interrupted company operations on the rising inflation where due to inflation, their hiring process will slow down and more ECONOMIC CLIMATE 5 temporary workers are needed. In addition to this, outsourcing will be embraced since it attracts cheaper labor, which is just as reliable. Federal Reserve’s Plans: Federal Reserve plan is a plan of the central bank on how to run its operations or systems. This includes the policy development on monetary changes. This operation affects how business is done in the nation and it ends up affecting short-term financial markets. The Federal Reserve plan this year has ended up hiking the interest rate and this is making it hard for the customers and business owners to access credits as they are keeping off from the interest charges. This has ended up crippling the short-term businesses. Federal Reserve plans are made by experts although at times it ends up causing hikes in different rates, especially on interest rates. The Federal Reserve plan has seen a hike in the federal interest rate and experts predict if the economy stays stable as it is now the federal rates may hike twice in 2019. The rise in the federal rate will eventually mean that the cost of borrowing will no longer be free. This will have an effect on businesses especially short-term financial markets as they will now have to endure the cost of borrowing. The effect on the short-term financial market is evident as now individuals will have to focus on the monthly payment of their credit cards and house mortgages rather than invest as they ought to. An example is in the year 2017 when the Federal Reserve rate hiked with 0.25%. This trickled down affecting auto loans and the sales for General Motors and Ford Motors dropped for the firm to keep their business running general motors liquidated its some of its assets for short-term stability. When Federal Reserve increase federal funds rate, it becomes more expensive for banks to borrow from the Federal Reserve and as a result, this triggers an increase in federal rates. An ECONOMIC CLIMATE 6 increase in federal funds rate has serious consequences on consumers. As federal funds rate increase, borrowers looking to take out loans and purchase vehicles from both Ford Motors and General Motors will have to pay more. This is because of the high interest rates imposed on loans, the rates received from automobile companies like Ford, and GM will be poorer. As at 2017, “an average five-year new car loan rate was 4.29% while the average 4-year used car loan rate is 4.91%” (Dickler, 2017). As a result, sales declines have been recorded over time like was the case in 2009 when a financial hit resulting in a crisis. The American sales market dropped by ten million customers annually and companies like General Motors went bankrupt (DeBord, 2018). Ethical Considerations: Ethical considerations are important and they play very important functions (Ponterotto, 2010). Taxation is the act of paying a certain fee on different commodities and services. This is one ethical consideration and it is important in the cash flow of both General motor and Ford motors. Taxation on General motor has seen the company report big losses especially after the reforms which were made in the Sarbanes–Oxley Act. Ford motor taxation has not had any major issues arising from taxation reforms as it experienced more sales of their product in their 20172018 financial year comparing it to the 2016-2017 financial year. Regulations also play a major contribution to business as it sets the directions those different firms that produce products of a certain nature has to adhere to (Minnis, 2011). The main purpose of these regulations is to either protect employees as well as help in the creation of a healthy business environment. These regulations ensure that there are good business competitions which make the companies targeting the same market to be more innovative in their production as well as their marketing strategies. ECONOMIC CLIMATE 7 General Motors and Ford motors are examples of firms that produce the same product and has a common market the regulations in place guides the two firms on how to handle their business in the best way possible so as to maximize their profits. Example General Motors and Ford motors sales in the year 2016 up to now has been experiencing an increase but there are fears that the increase in taxation may cripple this progress as it is evidently seen as people are now keeping away from showrooms since the restructuring of taxation as recorded by Detroit press on data release of September 2017. The two major ethical considerations that companies are expected to adhere to include taxation and regulation. In this case, taxation is a mandate to every company and employed individuals where these taxes are used for development purposes thus improving the quality of life for the taxpayers. On the other hand, regulations that are set by a given authority are meant to ensure that only companies that meet these regulations should be in operation. They also protect employees from being taken advantage of by companies. However, in an instance where automobile companies are expected to pay hefty taxes to the government, these companies are discouraged and may reconsider working in the said environment. A classic example is how Ford Motors and General Motors have been recording high sales but as hefty taxes are imposed on them, these automobile companies are afraid that the high taxes will cripple the business thus reducing their core cash flow significantly. On the other hand, these automobile companies are having a difficult time penetrating nations with strict regulations in regards to international trade, which is affecting their core cash flow. Although this is a normal occurrence, it is discouraging for most companies looking to expand internationally. ECONOMIC CLIMATE 8 Reference Ahmad, M. I., Rehman, R. U., & Raoof, A. (2010). Do interest rate, exchange rate affect Stock returns? A Pakistani Perspective. International Research Journal of Finance and Economics, 50, 146-150. Minnis, M. (2011). The value of financial statement verification in debt financing: Evidence from private US firms. Journal of accounting research, 49(2), 457-506. Ponterotto, J. G. (2010). Qualitative research in multicultural psychology: Philosophical underpinnings, popular approaches, and ethical considerations. Cultural Diversity and Ethnic Minority Psychology, 16(4), 581. Carey, N. (2018). Ford Accelerates Cost-Cutting Plan, Will Drop Most U.S Sedans. Reuters. DeBord, M. (2018). 10 Predictions for the US Auto Market in 2018 (GM, TSLA, F, FCAU). Business Insider. Dickler, J. (2017). How the Fed Rate Hike will affect Your Finance. CNBC. Haglund, R. (2015). Despite Decades of Losses, General Motors still has Significant Economic Impact. Lansing News. Jacobson, T. (2018). Ford: Insure Sales Under $10? Individual Trader. Josephs, L. (2018). General Motors is prepared to raise Prices to Offset Commodity Price Jump. CNBC. More, R. (2009). How General Motors Lost its Focus- and Its Way. IVEY Business Journal. ECONOMIC CLIMATE Renee, J. (2018). How Inflation Affects the Car Industry and Finance. Engineer Your Finances. Trefis Team. (2011). Ford Turns Commodity Inflation into Higher Car Prices. Forbes. 9 ECONOMIC CLIMATE 10 Feedback I would like to see a little more detail on the economic climate of interest rates - attempt to pull some additional information and context off of the Fed's website. Assessment of the Economic Climate: Rate of Inflation: I have very similar commentary for this section. You did a nice job of relating this section back your companies. I would like you to look at some of your detailed overview information - remember that you are evaluating the companies. Not the consumers - keep that focus throughout your milestone. Assessment of the Economic Climate: Federal Reserve’s Plans: You make some good points in this section. Once again, however, make sure that you focus on the businesses and not the consumer. I would like to see you go into a little more depth on the Fed's plans and the potential impact of those plans on your companies. Assessment of the Economic Climate: Ethical Considerations: I think you took the two examples a little too literally - I would like to see a slightly more broad context and understanding of SOX and it's impact on your businesses. Don't lose the solid detail that you have - just supplement it with some additional points. Articulation of Response: Careful on your references - make sure that you fully reference any material that is not your own (within the body of the document). Running head: EVALUATION OF THE FIRMS Evaluation of the Firms Name Institution Date 2 EVALUATION OF THE FIRMS Liquidity ratios When computing liquidity ratios, one has to compute the current ratio, quick ratio, and the cash ratio. Explanation of current ratio for Ford Company The current ratio for Ford Company was 1.201 in 2016 and 1.225 in 2017. This was an increase of 0.024. The current ratio measures the value of current assets against current liabilities. Therefore, it can be explained as current assets÷ current liabilities. The purpose of the current ratio is to assess if the corporation has the capacity to pay short-term obligations in any case of liquidation of its current assets. A low current ratio indicates that a company might have trouble paying its liabilities. For instance, a cash ratio of less than one means that if the business liquidates all its current assets it would still have problems paying its liabilities. Therefore, Ford company current ratio shows that it has the capability of paying its short-term liabilities. For instance, in 2017, the Company current ratio indicates that it is in a position to cover 122.5% of its liabilities in times of liquidation. Explanation of current ratio for General Motors Company General Motors experienced a current ratio of 0.894 in 2016 and in 2017 the ratio was still 0.894. Since the current ratio is less than one, it means that the company will have problems paying its short-term liabilities in case of liquidation. In the eventuality of liquidation, the company’s current assets can only cover 89.4% of the liabilities. 3 EVALUATION OF THE FIRMS Explanation of acid test ratio for Ford Company Quick ratio assesses a company’s capability to settle up current debts through its quick assets. The acid test ratio for Ford Motors was 0.55 in 2016 and 0.52 in 2017. A ratio below 1 indicates that the company is unable to pay its current debts. However, it does not indicate that the company is broke but it could also mean that the firm is depending more on inventory and other assets to pay debts that have accumulated on a short-term basis. Additionally, the ratio can also indicate that the business has a higher account receivable. Explanation of acid test for General motors company General Motors had an acid-test of 0.404 in 206 and 0.416 in 2017. This was a slight increase but it affirms the fact that the company cannot be able to pay its current assets through its quick assets. Explanation of cash ratio for Ford Company The cash ratio for the company was 0.43 in 2016 and 0.411 in 2017. This means that the company could only cover 43% of its liabilities in 2016 using its cash and marketable securities. The same case applies in 2017 whereby the company could only meet 41% of its liabilities via its cash and marketable securities. Explanation of cash ratio for General Motors Company The cash ratio was 0.29 in 2016 and 0.31 in 2017. This was an increase, therefore, meaning that the company could only pay its liabilities through cash and liabilities by 31%. 4 EVALUATION OF THE FIRMS Debt ratios The debt to equity ratio of these companies tends to be higher because they have a lot of liabilities. This is expected from manufacturing companies. Explanation of debt to asset ratio for Ford Company This type of ratio measures the section of a company’s asset that is funded by debt. It is computed by dividing the total assets and total liabilities. Therefore, Ford Motor Company had a debt to asset ratio of 1.15 in 2017 and 0.86 in 2016. A larger percentage means that the company is using a higher amount of financial leverage thus increasing fixed interest payments which are a risk to the business. Ford Company has a higher risk of 115% in 2017 than in 2016 when it had 86%. Explanation of debt to asset ratio for General Motors Company The debt-asset ratio for this company was 2.398 in 2016 and 1.205 in 2017. In 2016 the company was exposing itself to a financial risk because the ratio was too high. However, there was an improvement in the reduction of the risk in 2017 although it was slightly high. Explanation of debt to equity ratio for Ford Motor Company This company had a debt to equity ratio of 6.38 in 2017 while in 2016 the debt to equity ratio was 7.15. This means that the company had $6.38 for every $1 of equity in 2017. A higher ratio means that most of the company’s finances are from borrowing. This may create a financial risk if the debt goes beyond unmanageable levels. 5 EVALUATION OF THE FIRMS Explanation of Debt to Equity Ratio for General Motors Company As for General Motors Company, the debt to equity ratio was 4.029 in 2016 and in 2017 it was 4.87. Its debt to equity ratio is lower than that of its competitor which is Ford Motor Company. In 2017, the debt to equity ratio meant that for every $1 of equity the company had $4.87. However, the ratio had increased by a small margin from 2016. Explanation of interest coverage ratio for Ford Motor Company When the interest coverage ratio of a company is low then questions are asked if it can be able to pay off its debt. As for the Ford Motor Company, the interest coverage ratio was 7.6 in 2016 and in 2017 the ratio was 7.2. Based on the figures, we can deduce that Ford Company has the ability to pay its debts. Explanation of interest coverage ratio for General Motor Company In 2017, the interest coverage ratio for this company was 20.6. This affirms that the company had the ability to pay off interest accumulated by debt Strengths One of the strengths is that the companies have an interest coverage ratio which is high. This means that they have the capability to pay off any interest that may be accumulated by debts. Any company that has an interest coverage ratio above 1 proves to be capable of paying interest accumulated from debt. For instance, the Ford Company had an interest coverage ratio of 7.2 while General Motors Company had interest coverage of 20.6. 6 EVALUATION OF THE FIRMS Weakness Both companies exhibited an acid test ratio of below 1. This indicates that the companies are not capable of paying their current debts. For instance, Ford Motor Company had a quick ratio of 0.52 in 2017 while General Motors showed a quick ratio of 0.416. Another weakness was seen when both companies presented a low cash ratio. For instance, Ford Motor Company had a cash ratio of 41% while General Motors had a cash ratio of 31%. The percentages represent the amount which the companies can pay off their liabilities using the cash and marketable securities. The percentage is very low if any case liquidation happens. The debt to asset ratio of both companies is high. In 2017, Ford motor company had a debt to asset ratio of 115% while General Motors presented a debt to equity ratio of 120.5%. This confirms that the majority of these companies assets are funded by debt. As a result, this may cause serious financial implications. 7 EVALUATION OF THE FIRMS References https://investor.gm.com/static-files/218be7b0-a09c-4ad1-815f-65a6181a75f9 http://q4live.s22.clientfiles.s3-website-us-east1.amazonaws.com/857684434/files/doc_financials/2017/annual/Final-Annual-Report2017.pdf Ford Motor company ratios for year 2016 and 2017 liquidity ratios Current ratio year 2017 Current ratio= current assets÷current liabilities 115902÷94600= 1.225 Current ratio year 2016 Current ratio= current assets÷current liabilities 108461÷90281=1.201 Quick ratio year 2016 Quick ratio= ( Cash+ short term securities+ accounts receivable)÷ current liabilities (15905+22922+11102)÷ 90281=0.55 Quick ratio year 2017 Quick ratio= ( Cash+ short term securities+ accounts receivable)÷ current liabilities (18492+ 20435+ 10599)÷ 94600= 0.52 Cash ratio 2016 Cash ratio= (Cash+ short term securities)÷ current liabilities (15905+22922)÷90281= 0.43 Cash ratio 2017 Cash ratio= (Cash+ short term securities)÷ current liabilities (18492+ 20436)÷ 94600= 0.411 Activity ratios Inventory turnover ratio year 2016 Inventory turnover ratio= Cost of Goods sold÷ average inventory 126183÷(8898+8319)= 7.32 Inventory turnover ratio year 2017 Inventory turnover ratio= Cost of Goods sold÷ average inventory 131332÷(8898+10277)= 6.85 Debt ratios Debt to asset ratios 2016 Debt to asset ratio= total assets÷total liabilities 208668÷237751=0.87 Debt to asset ratios 2017 Debt to asset ratio= total assets÷total liabilities 257808÷222792=1.15 Debt to equity ratio 2016 Debt to equity ratio= total liabilities÷ shareholders equity 208668÷29187=7.15 Debt to equity ratio 2017 Debt to equity ratio= total liabilities÷ shareholders equity 222792÷34918=6.38 Interest coverage ratio 2016 interest coverage ratio= earnings before interest and tax÷interest payments 6796÷894= 7.6 Interest coverage ratio 2017 interest coverage ratio= earnings before interest and tax÷interest payments 8148÷1133=7.2 Ford Motor company ratios for year 2016 and 2017 liquidity ratios Current ratio year 2017 Current ratio= current assets÷current liabilities 115902÷94600= 1.225 Current ratio year 2016 Current ratio= current assets÷current liabilities 108461÷90281=1.201 Quick ratio year 2016 Quick ratio= ( Cash+ short term securities+ accounts receivable)÷ current liabilities (15905+22922+11102)÷ 90281=0.55 Quick ratio year 2017 Quick ratio= ( Cash+ short term securities+ accounts receivable)÷ current liabilities (18492+ 20435+ 10599)÷ 94600= 0.52 Cash ratio 2016 Cash ratio= (Cash+ short term securities)÷ current liabilities (15905+22922)÷90281= 0.43 Cash ratio 2017 Cash ratio= (Cash+ short term securities)÷ current liabilities (18492+ 20436)÷ 94600= 0.411 Activity ratios Inventory turnover ratio year 2016 Inventory turnover ratio= Cost of Goods sold÷ average inventory 126183÷(8898+8319)= 7.32 Inventory turnover ratio year 2017 Inventory turnover ratio= Cost of Goods sold÷ average inventory 131332÷(8898+10277)= 6.85 Debt ratios Debt to asset ratios 2016 Debt to asset ratio= total assets÷total liabilities 208668÷237751=0.87 Debt to asset ratios 2017 Debt to asset ratio= total assets÷total liabilities 257808÷222792=1.15 Debt to equity ratio 2016 Debt to equity ratio= total liabilities÷ shareholders equity 208668÷29187=7.15 Debt to equity ratio 2017 Debt to equity ratio= total liabilities÷ shareholders equity 222792÷34918=6.38 Interest coverage ratio 2016 interest coverage ratio= earnings before interest and tax÷interest payments 6796÷894= 7.6 Interest coverage ratio 2017 interest coverage ratio= earnings before interest and tax÷interest payments 8148÷1133=7.2 General Motors Company Ratios for year 2016 and 2017 Liquidity ratios current ratio year 2016 Current ratio=current assets÷current liabilities 76203÷85181= 0.894 Current ratio year 2017 Current ratio=current assets÷current liabilities 68744÷76890=0.89 Quick ratio year 2016 Quick ratio= ( Cash+ short term securities+ accounts receivable)÷ current (12960+11841+9638)÷ 85181= 0.404 Quick ratio year 2017 Quick ratio= ( Cash+ short term securities+ accounts receivable)÷ current (15512+8313+8164)÷76890= 0.416 Cash ratio 2016 Cash ratio= (Cash+ short term securities)÷ current liabilities (12960+11841)÷85181= 0.29 Cash ratio 2017 Cash ratio= (Cash+ short term securities)÷ current liabilities (15512+8313)÷76890= 0.31 Activity ratios Inventory turnover ratio year 2016 Inventory turnover ratio= Cost of Goods sold÷ average inventory 136333÷(13788+13764)= 4.95 Inventory turnover ratio year 2017 Inventory turnover ratio= Cost of Goods sold÷ average inventory 114869÷(10,633+11040)= 5.3 Debt ratios Debt ratios 2016 Debt to asset ratio= total assets÷total liabilities 221,690÷92434= 2.398 Debt ratios 2017 Debt to asset ratio= total assets÷total liabilities 212482÷176282=1.205 Debt to equity ratio 2016 Debt to equity ratio = total liabilities÷ shareholders equity 177615÷44075= 4.029 Debt to equity ratio 2017 Debt to equity ratio = total liabilities÷ shareholders equity 176282÷36200= 4.87 Interest coverage ratio 2016 interest coverage ratio= earnings before interest and tax÷interest paym 12008÷ 563= 21.3 Interest coverage ratio 2016 interest coverage ratio= earnings before interest and tax÷interest paym 11863÷575= 20.6 General Motors Company Ratios for year 2016 and 2017 Liquidity ratios current ratio year 2016 Current ratio=current assets÷current liabilities 76203÷85181= 0.894 Current ratio year 2017 Current ratio=current assets÷current liabilities 68744÷76890=0.89 Quick ratio year 2016 Quick ratio= ( Cash+ short term securities+ accounts receivable)÷ current liabilities (12960+11841+9638)÷ 85181= 0.404 Quick ratio year 2017 Quick ratio= ( Cash+ short term securities+ accounts receivable)÷ current liabilities (15512+8313+8164)÷76890= 0.416 Cash ratio 2016 Cash ratio= (Cash+ short term securities)÷ current liabilities (12960+11841)÷85181= 0.29 Cash ratio 2017 Cash ratio= (Cash+ short term securities)÷ current liabilities (15512+8313)÷76890= 0.31 Activity ratios Inventory turnover ratio year 2016 Inventory turnover ratio= Cost of Goods sold÷ average inventory 136333÷(13788+13764)= 4.95 Inventory turnover ratio year 2017 Inventory turnover ratio= Cost of Goods sold÷ average inventory 114869÷(10,633+11040)= 5.3 Debt ratios Debt ratios 2016 Debt to asset ratio= total assets÷total liabilities 221,690÷92434= 2.398 Debt ratios 2017 Debt to asset ratio= total assets÷total liabilities 212482÷176282=1.205 Debt to equity ratio 2016 Debt to equity ratio = total liabilities÷ shareholders equity 177615÷44075= 4.029 Debt to equity ratio 2017 Debt to equity ratio = total liabilities÷ shareholders equity 176282÷36200= 4.87 Interest coverage ratio 2016 interest coverage ratio= earnings before interest and tax÷interest payments 12008÷ 563= 21.3 Interest coverage ratio 2016 interest coverage ratio= earnings before interest and tax÷interest payments 11863÷575= 20.6 0 Ford Motor company ratios for year 2016 and 2017 liquidity ratios Current ratio year 2017 Current ratio= current assets÷current liabilities 115902÷94600= 1.225 Current ratio year 2016 Current ratio= current assets÷current liabilities 108461÷90281=1.201 Quick ratio year 2016 Quick ratio= ( Cash+ short term securities+ accounts receivable)÷ current liabilities (15905+22922+11102)÷ 90281=0.55 Quick ratio year 2017 Quick ratio= ( Cash+ short term securities+ accounts receivable)÷ current liabilities (18492+ 20435+ 10599)÷ 94600= 0.52 Cash ratio 2016 Cash ratio= (Cash+ short term securities)÷ current liabilities (15905+22922)÷90281= 0.43 Cash ratio 2017 Cash ratio= (Cash+ short term securities)÷ current liabilities (18492+ 20436)÷ 94600= 0.411 Activity ratios Inventory turnover ratio year 2016 Inventory turnover ratio= Cost of Goods sold÷ average inventory 126183÷(8898+8319)= 7.32 Inventory turnover ratio year 2017 Inventory turnover ratio= Cost of Goods sold÷ average inventory 131332÷(8898+10277)= 6.85 Debt ratios Debt to asset ratios 2016 Debt to asset ratio= total assets÷total liabilities 208668÷237751=0.87 Debt to asset ratios 2017 Debt to asset ratio= total assets÷total liabilities 257808÷222792=1.15 Debt to equity ratio 2016 Debt to equity ratio= total liabilities÷ shareholders equity 208668÷29187=7.15 Debt to equity ratio 2017 Debt to equity ratio= total liabilities÷ shareholders equity 222792÷34918=6.38 Interest coverage ratio 2016 interest coverage ratio= earnings before interest and tax÷interest payments 6796÷894= 7.6 Interest coverage ratio 2017 interest coverage ratio= earnings before interest and tax÷interest payments 8148÷1133=7.2 Ford Motor company ratios for year 2016 and 2017 liquidity ratios Current ratio year 2017 Current ratio= current assets÷current liabilities 115902÷94600= 1.225 Current ratio year 2016 Current ratio= current assets÷current liabilities 108461÷90281=1.201 Quick ratio year 2016 Quick ratio= ( Cash+ short term securities+ accounts receivable)÷ current liabilities (15905+22922+11102)÷ 90281=0.55 Quick ratio year 2017 Quick ratio= ( Cash+ short term securities+ accounts receivable)÷ current liabilities (18492+ 20435+ 10599)÷ 94600= 0.52 Cash ratio 2016 Cash ratio= (Cash+ short term securities)÷ current liabilities (15905+22922)÷90281= 0.43 Cash ratio 2017 Cash ratio= (Cash+ short term securities)÷ current liabilities (18492+ 20436)÷ 94600= 0.411 Activity ratios Inventory turnover ratio year 2016 Inventory turnover ratio= Cost of Goods sold÷ average inventory 126183÷(8898+8319)= 7.32 Inventory turnover ratio year 2017 Inventory turnover ratio= Cost of Goods sold÷ average inventory 131332÷(8898+10277)= 6.85 Debt ratios Debt to asset ratios 2016 Debt to asset ratio= total assets÷total liabilities 208668÷237751=0.87 Debt to asset ratios 2017 Debt to asset ratio= total assets÷total liabilities 257808÷222792=1.15 Debt to equity ratio 2016 Debt to equity ratio= total liabilities÷ shareholders equity 208668÷29187=7.15 Debt to equity ratio 2017 Debt to equity ratio= total liabilities÷ shareholders equity 222792÷34918=6.38 Interest coverage ratio 2016 interest coverage ratio= earnings before interest and tax÷interest payments 6796÷894= 7.6 Interest coverage ratio 2017 interest coverage ratio= earnings before interest and tax÷interest payments 8148÷1133=7.2 General Motors Company Ratios for year 2016 and 2017 Liquidity ratios current ratio year 2016 Current ratio=current assets÷current liabilities 76203÷85181= 0.894 Current ratio year 2017 Current ratio=current assets÷current liabilities 68744÷76890=0.89 Quick ratio year 2016 Quick ratio= ( Cash+ short term securities+ accounts receivable)÷ current (12960+11841+9638)÷ 85181= 0.404 Quick ratio year 2017 Quick ratio= ( Cash+ short term securities+ accounts receivable)÷ current (15512+8313+8164)÷76890= 0.416 Cash ratio 2016 Cash ratio= (Cash+ short term securities)÷ current liabilities (12960+11841)÷85181= 0.29 Cash ratio 2017 Cash ratio= (Cash+ short term securities)÷ current liabilities (15512+8313)÷76890= 0.31 Activity ratios Inventory turnover ratio year 2016 Inventory turnover ratio= Cost of Goods sold÷ average inventory 136333÷(13788+13764)= 4.95 Inventory turnover ratio year 2017 Inventory turnover ratio= Cost of Goods sold÷ average inventory 114869÷(10,633+11040)= 5.3 Debt ratios Debt ratios 2016 Debt to asset ratio= total assets÷total liabilities 221,690÷92434= 2.398 Debt ratios 2017 Debt to asset ratio= total assets÷total liabilities 212482÷176282=1.205 Debt to equity ratio 2016 Debt to equity ratio = total liabilities÷ shareholders equity 177615÷44075= 4.029 Debt to equity ratio 2017 Debt to equity ratio = total liabilities÷ shareholders equity 176282÷36200= 4.87 Interest coverage ratio 2016 interest coverage ratio= earnings before interest and tax÷interest paym 12008÷ 563= 21.3 Interest coverage ratio 2016 interest coverage ratio= earnings before interest and tax÷interest paym 11863÷575= 20.6 General Motors Company Ratios for year 2016 and 2017 Liquidity ratios current ratio year 2016 Current ratio=current assets÷current liabilities 76203÷85181= 0.894 Current ratio year 2017 Current ratio=current assets÷current liabilities 68744÷76890=0.89 Quick ratio year 2016 Quick ratio= ( Cash+ short term securities+ accounts receivable)÷ current liabilities (12960+11841+9638)÷ 85181= 0.404 Quick ratio year 2017 Quick ratio= ( Cash+ short term securities+ accounts receivable)÷ current liabilities (15512+8313+8164)÷76890= 0.416 Cash ratio 2016 Cash ratio= (Cash+ short term securities)÷ current liabilities (12960+11841)÷85181= 0.29 Cash ratio 2017 Cash ratio= (Cash+ short term securities)÷ current liabilities (15512+8313)÷76890= 0.31 Activity ratios Inventory turnover ratio year 2016 Inventory turnover ratio= Cost of Goods sold÷ average inventory 136333÷(13788+13764)= 4.95 Inventory turnover ratio year 2017 Inventory turnover ratio= Cost of Goods sold÷ average inventory 114869÷(10,633+11040)= 5.3 Debt ratios Debt ratios 2016 Debt to asset ratio= total assets÷total liabilities 221,690÷92434= 2.398 Debt ratios 2017 Debt to asset ratio= total assets÷total liabilities 212482÷176282=1.205 Debt to equity ratio 2016 Debt to equity ratio = total liabilities÷ shareholders equity 177615÷44075= 4.029 Debt to equity ratio 2017 Debt to equity ratio = total liabilities÷ shareholders equity 176282÷36200= 4.87 Interest coverage ratio 2016 interest coverage ratio= earnings before interest and tax÷interest payments 12008÷ 563= 21.3 Interest coverage ratio 2016 interest coverage ratio= earnings before interest and tax÷interest payments 11863÷575= 20.6 0 
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