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Ford Free Cash Flow and Cash on Hand Analysis

Ford River Rouge Complex, Dearborn, MI. Image source: Flickr

Cash is the lifeline of a business.

It’s even more so for Ford Motor (NYSE:F), a leading automobile company that specializes in the design and manufacturing of cars, trucks and SUVs, since the company is running a capital-intensive business.

Every quarter, Ford spends a considerable amount of cash on factories, equipment, offices, warehouses, and workers.

These are the expenses that consume a huge amount of the company’s working capital.

Even when sales get hit, Ford still needs to maintain these expenses by spending huge sums of cash.

There is a reason that these expenses are sometimes referred to as fixed costs and to make matters worst, they are difficult to dismiss.

During a liquidity crisis, Ford will most likely suspend or cut the cash dividends to preserve cash and if things have not improved, the company may plunge into bankruptcy in no time.

Therefore, it’s important to maintain a certain amount of cash or its equivalents in the balance sheets.

In this article, we are keeping track of Ford’s cash reserves or cash on hand as reported in the balance sheets from quarter to quarter to find out how the company’s liquidity had changed in the past.

Additionally, we will also find out whether Ford’s cash reserves had been sufficient to cover the cash outflow or cash burn, and if the company had requested an external capital injection to boost its cash position.

Let’s move on!

Ford Cash On Hand By Quarter

Ford Motor cash on hand by quarter

Ford Motor cash on hand by quarter

* These are GAAP figures that do not come from the recast data and were extracted from the exact quarters in Ford’s quarterly and annual statements.

Let’s first look at Ford’s total cash on hand or cash reserves as stated in the company’s balance sheets for the period from 2018 to 2020.

In general, Ford’s cash on hand measured in the chart above consists of all highly liquid assets such as cash and cash equivalents, restricted cash and marketable securities.

The figures in the plot are the total sums of Ford’s cash and cash equivalents, restricted cash and marketable securities.

These are liquid assets that can be deployed instantly such as cash while marketable securities are available for deployment within a year.

All told, Ford’s cash reserves averaged around $35 billion in the past but have soared above $40 billion in 2020.

In 2020 2Q alone, Ford’s total cash or highly liquid assets increased as much as 50% to $57 billion from a year ago.

That figure has declined slightly to around $51 billion by 2020 4Q but was still 45% higher than the figure in the same quarter a year ago.

One notable reason for the sudden jump in Ford’s cash on hand in 2020 has to do with the COVID-19 pandemic that started in early 2020.

In early 2020, Ford may have been expecting a very severe economic downturn, driven primarily by the negative impact the pandemic would bring, and thus, the cash hoarding by the company.

While there has been some impact from the pandemic, it was not as devastating as Ford had expected.

Ford’s sales revenue actually has recovered significantly to its pre-pandemic level by the 4th quarter of 2020.

As such, Ford has paid back some of the long and short-term debts, and this has led to the decline in the company’s cash on hand by the end of 2020.

Ford Cash On Hand Breakdown

Ford Motor cash on hand breakdown

Ford Motor cash on hand breakdown

* These are GAAP figures that do not come from the recast data and were extracted from the exact quarters in Ford’s quarterly and annual statements.

As mentioned, Ford’s total cash reserves come primarily from the company’s highly liquid assets such as cash and cash equivalents, marketable securities and restricted cash.

The breakdown of Ford’s cash on hand is shown in the chart above to show readers the type of liquid assets Ford has within its cash position.

As shown, Ford’s total cash on hand comes primarily from 2 main liquid assets, namely cash and cash equivalents and marketable securities.

The restricted cash amount is negligible and is not shown in the chart above.

Both highly liquid assets took up an equal portion of Ford’s total cash position from 2018 to 2020.

While both assets had remained steady from 2018 to 2019, they increased significantly in 2020, with cash and cash equivalents reaching slightly more than $30 billion in 2Q 2020.

In the same quarter, Ford’s marketable securities soared to $26 billion, a 70% increase from a year ago.

By the 4th quarter of 2020, both cash and marketable securities declined to around $25 billion each.

Throughout 2020, Ford’s cash and cash equivalents increased the most when it was needed the most, and the same asset also declined the most when it was not required.

This trend shows that Ford preferred cash and cash equivalents more than it preferred marketable securities when it comes to liquidity.

By comparison, cash and cash equivalents are a tad more liquid than marketable securities since the latter requires a slightly longer time to convert to cash.

Ford Cash On Hand to Current Assets Ratio

Ford Motor cash on hand to current assets ratio

Ford Motor cash on hand to current assets ratio

* Author’s own calculation.

The absolute value of Ford’s cash on hand may not depict the real situation of the company.

The absolute value may have increased but the growth could come from the normal expansion of the company’s businesses instead of a deliberate effort that scaled up the liquidity.

To really see Ford’s has indeed worked on its cash on hand, it’s best to see it with respect to the company’s current assets.

For this reason, a plot above is created to show the ratio of Ford’s cash reserves to current assets.

The ratio measures how Ford’s total cash on hand changes with respect to current assets, and it gives a comparative view on how these highly liquid assets change relative to the company’s current assets.

All told, the chart above shows that the ratio did increase significantly throughout 2020.

Prior to 2020, the ratio remained at slightly above 30%, but it started to grow in 1Q 2020 and stayed above 40% for the rest of 2020, a notable 10 percentage points higher than the figure in 2019.

In other words, Ford has indeed put an effort to increase its cash position relative to current assets in preparation for a looming liquidity crunch.

Ford Free Cash Flow – TTM

Ford Motor free cash flow - TTM

Ford Motor free cash flow – TTM

* TTM free cash flow comes from the author’s own calculation using GAAP figures extracted from Ford’s cash flow statements.

While Ford may have boosted its cash reserves notably in 2020, how do we know if these figures are sufficient for the company’s cash burn or cash outflow?

To figure this out, we may look at Ford’s free cash flow which is shown in the chart above for the period from 2018 to 2020.

Readers who are not familiar with free cash flow may visit this page for the definition – what is free cash flow.

In general, free cash flow is measured using the following equation:

Free cash flow = Net cash from business operations – Capital spending

According to the chart, Ford’s TTM free cash flow has been increasing in the last 3 years and reached a new high at more than $18 billion as of 2020 4Q.

Between 2018 and 2020, Ford had been having positive free cash flow, which means the company’s business operations had been able to generate sufficient cash to support its expenses, including capital spending.

Ford’s free cash flow may have dipped considerably to only $5.8 billion in Q1 2020, but it recovered swiftly in the following quarter and even reached multiple new highs at $16 billion and $18 billion in 3Q and 4Q 2020, respectively.

The results show that Ford’s cash flow generation capability had only been minimally impacted by the COVID-19 pandemic which was limited to only the 1st quarter of 2020.

For the rest of 2020, Ford’s free cash flow had recovered and even exceeded its pre-pandemic figures, showing how the company had been a cash cow even at the peak of the COVID-19 rampage.

Since Ford had been able to generate tonnes of free cash flow from its core operations, we can conclude that Ford’s cash reserves had been sufficient to cover its cash burn or cash outflow.

Ford Adjusted Free Cash Flow – TTM

Ford Motor adjusted free cash flow - TTM

Ford Motor adjusted free cash flow – TTM

* TTM adjusted free cash flow comes from Ford’s calculation and is a non-GAAP figure.

If Ford had been a cash cow, why on earth had the company increased its cash stockpiles even before the COVID-19 pandemic had become mainstream?

To answer this question, we need to look at Ford’s adjusted free cash flow which is shown in the chart above for the period from 2018 to 2020.

What is Ford’s adjusted free cash flow?

The adjusted free cash flow is slightly different from the GAAP free cash flow in the way that the adjusted free cash flow treats several cash items differently.

To make things simpler, Ford’s adjusted free cash flow takes into account the following 2 cash items into the free cash flow equation:

1. Ford Credit operating cash flow
2. Dividends that come from Ford Credit

The free cash flow equation has now become something like the following:

Adjusted free cash flow = Net cash from business operations – Net cash from Ford Credit operating cash flow – Capital spending + Ford Credit cash dividends

According to the formula, Ford’s adjusted free cash flow excludes the cash flow from Ford Credits while including dividend payments from Ford Credits.

In short, Ford’s adjusted free cash flow is almost similar to the free cash flow generated from Ford Automotive alone.

All told, Ford’s adjusted free cash flow had been a total disaster when compared to the non-adjusted free cash flow as shown in the chart.

The most obvious trend lies in the fact that Ford’s adjusted free cash flow had been a lot lesser than its GAAP counterpart in most quarterly results.

For example, Ford’s adjusted free cash flow had been mostly in the red throughout 2020, with the 2Q 2020 quarter even reporting a cash deficit that reached nearly $7 billion.

Prior to 2020, Ford’s adjusted free cash flow also had been fewer by several billion dollars compared to its GAAP counterparts.

Therefore, without including the net cash from Ford Credit, Ford’s free cash flow had become be a lot smaller and even turned negative.

In other words, the free cash flow generated from Ford Automotive’s segment alone had fallen short of the company’s required cash outflow.

Since Ford Automotive had not been able to generate sufficient free cash flow, this situation may have prompted Ford to stockpile its cash reserves throughout 2020.

Ford Net Cash from Financing Activities

Ford Motor net cash from financing activities

Ford Motor net cash from financing activities

* These are GAAP figures that were extracted from the exact quarters in Ford’s quarterly and annual statements of cash flow.

The net cash from financing activities as shown in the chart above depicts Ford’s capital raise on a quarterly basis.

Prior to 2020, Ford raised very little capital as reflected in all the negative figures in the chart.

A negative figure in the chart means Ford had actually paid back the borrowed debts.

On the other hand, a positive figure shows that Ford had raised cash through external financings such as equity or debt.

All told, Ford’s net cash from financing activities had been positive in 3 out of the 4 quarters in 2020, indicating that the company had raised cash quite significantly throughout 2020.

While Ford’s net cash from financing activities totaled the most at $12 billion and $7 billion in the 1st and 2nd quarters of 2020, respectively, we can see that the company had actually paid back a notable amount of debt at $19 billion in 2020 3Q.

In early 2020, Ford may have anticipated a looming economic crisis, driven primarily by the negative impact of the COVID-19 outbreak and hence, the capital raise in the 1st and 2nd quarters.

When Ford’s free cash flow actually ballooned and the situation wasn’t as bad as Ford had expected, the company felt that it didn’t require the extra cash and paid it back in the 3rd quarter.

All in all, Ford normally doesn’t need that much of a capital raise during the normal course of its business operations.

If not for the COVID-19 outbreak which has negatively affected the global automotive sector, Ford would not have gone to the capital market to raise cash.

Additionally, Ford’s combined free cash flow alone had been able to sufficiently cover the company’s expenses.

By all means, Ford will not be requiring any capital raise in the future if its free cash flow keeps soaring.

Conclusion

In summary, Ford’s cash on hand grew the most in early 2020 when the company was anticipating a possible liquidity crunch, driven mainly by the negative impact of COVID-19.

During the same period, Ford’s net cash from financing activities also soared in tandem with the company’s cash position.

While Ford may have been generating piles of free cash flow even during the pandemic, its Automotive segment had fallen short on cash as seen from the negative adjusted free cash flow in 3 out of the 4 quarters in 2020.

That had probably prompted Ford to raise cash and keep a large cash stockpile in preparation for a very bad business environment.

It turned out that the automotive sector recovered faster than Ford had expected when its combined free cash flow soared to multiple highs by the end of 2020.

All in all, Ford had been a cash cow in the last 3 years and will most likely remain so going into the future.

References and Credits

1. All financial data such as cash on hand, free cash flow, etc., were obtained and referenced from Ford’s quarterly and annual statements which can be found in Ford’s Financials and Filings.

2. Some ratios and figures are calculated by the author. Rounding errors may exist.

3. Featured images in this article are used under creative commons license and sourced from the following websites: Thomas Hawk and Stefan Kellner.

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