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Is Ford’s $160 Billion Debt A Cause For Concern?

Edmonton Motor Show 2017. Source: Flickr Image

The debt portion of a company is often a hot topic among investors.

The reason is that debt is usually the main cause of bankruptcy for most companies.

It’s no exception for Ford Motor Company (NYSE:F).

If Ford carries too much debt and the risk of default is imminent, the company may need to take some drastic actions, including debt restructuring and assets disposal.

That said, in this article, we will look at a couple of debt-related metrics, including Ford’s total debt, net debt and debt breakdown.

Additionally, we will look at Ford’s debt leverage with respect to total equity.

This analysis is related to using the debt to equity ratio.

Aside from leverage, the capital structure is another topic that we will zoom into to find out the ratio of Ford’s total debt with respect to total assets.

Moreover, we will drill into Ford’s liquid assets and compare them with the company’s total debt.

Lastly, we will measure Ford’s debt utilization by looking at the company’s total debt to sales or revenue ratio.

Without any delay, let’s move on!

Ford’s Total Debt

Ford total debt

Ford total debt

* Total debt is a GAAP measure computed by the author using Ford’s short and long-term debt obtained from the company’s balance sheets.

Based on the chart, Ford’s total debt has been on a rise between 2017 and 2020 and reached $161 billion as of 2020 Q4.

Prior to 2020, Ford’s total debt averaged around $150 billion.

Ford’s total debt increased the most in 2020, and hit a record high at more than $170 billion in 2Q 2020 when the company racked up debt to boost its liquidity during the onset of the COVID-19 outbreak.

Ford’s total debt decreased slightly to $161 billion by the 4th quarter of 2020 after the company repaid the full amounts drawn under its credit facilities.

Ford’s Total Debt Breakdown

Ford total debt breakdown

Ford total debt breakdown

* Total debt breakdown is a GAAP measure and consists of Ford’s automotive debt and Ford Credit’s debt obtained from the company’s balance sheets.

To see what makes up Ford’s total debt, we look at the debt breakdown as shown in the chart above.

According to the chart, Ford’s total debt came mainly from 2 segments and they are Ford’s automotive and Ford Credit.

Ford Credit’s debt made up the majority of Ford’s total debt, at over 85% as of 2020 Q4.

In the same quarter, Ford Credit’s debt totaled nearly $140 billion compared to only $20 billion of Ford’s automotive debt.

Ford’s Automotive Debt

Ford Automotive debt

Ford Automotive debt

* Automotive debt is a GAAP measure and consists of Ford automotive’s short and long-term debt obtained from the company’s balance sheets.

The chart above shows a more refined version of Ford’s automotive debt.

As shown, Ford’s automotive debt increased significantly during 2020 by more than 100% and reached nearly $40 billion in 2020 2Q.

Prior to 2020, Ford’s automotive debt averaged around $15 billion and the figure started to rise in 1Q 2020 to about $25 billion before reaching the $40 billion level in 2Q 2020.

When the COVID-19 pandemic started to hit, Ford Automotive drew on cash from the credit facilities and took on an $8 billion debt in 2Q 2020, causing automotive debt to rise significantly in 2020.

The excess cash drawn from the credit facilities was meant to help Ford to weather the negative impact caused by the COVID-19.

For your information, the pandemic has shuttered the production at most of Ford’s assembly plants.

By the 4th quarter of 2020, Ford has repaid most of the debt drawn from its credit facilities, causing Ford’s automotive debt to drop to $24 billion.

Ford’s Credit Debt

Ford Credit debt

Ford Credit debt

* Ford Credit debt is a GAAP measure and consists of Ford Credit’s short and long-term debt obtained from the company’s balance sheets.

On the flipped side, Ford Credit’s debt decreased significantly during 2020 and reached $133 billion by 2020 Q3, which was well below its historical high.

By the 4th quarter of 2020, Ford Credit’s debt had risen slightly to $137 billion.

Prior to 2020, Ford Credit’s debt averaged around $140 billion and had actually been on a rise since 2017.

The decline in Ford Credit’s debt in 2020 can be attributed to the fact that Ford Credit runs on a completely different business model from Ford Automotive.

For your information, Ford Credit is the captive finance arm of Ford Motors Company, providing financial services such as lending and leasing services to wholesalers as well as retail customers.

During the age of the COVID-19, Ford Credit expects a reduction in lending and leasing activities, and projects to decrease the size of its balance sheet and funding requirement in 2020.

The following excerpt extracted from the 2Q 2020 filings shows Ford’s statement regarding the impact of the COVID-19 on Ford Credit:

  • The predominant share of Ford Credit’s business consists of financing Ford and Lincoln vehicles, and the duration or reemergence of COVID-19 or similar public health issues may negatively impact the level of originations at Ford Credit.

    For example, Ford’s suspension of manufacturing operations, a significant decline in dealer showroom traffic, and/or a reduction of operations at dealers may lead to a significant decline in Ford Credit’s consumer and non-consumer originations.

In short, Ford Credit’s debt increases during a good economic cycle but decreases when the automotive business environment deteriorates as there will be fewer customers signing up for Ford Credit’s leasing contracts.

Additionally, Ford Credit’s debt is pretty safe as these debt loads are usually backed by cash collected from Ford’s finance receivables – a type of Ford’s assets that originates from customers’ borrowings from Ford Credit.

Ford’s Net Debt

Ford net debt

Ford net debt

* Net debt is computed by the author using Ford’s total debt and highly liquid assets such as cash as well as securities obtained from the company’s balance sheets.

Ford’s net debt is calculated by having Ford’s total debt deducting the company’s total cash and cash equivalents as well as marketable securities as shown in the following equation:

Ford’s net debt = Total debt – Cash – Marketable Securities

Marketable securities are included as these are near cash assets that can be converted to cash almost instantly.

As shown in the chart above, Ford’s net debt increased from slightly more than $105 billion reported in 1Q17 to its peak level at $121 billion reported in 2Q20.

Since then, Ford’s net debt has declined to $112 billion by the 4th quarter of 2020.

Ford increased its cash position significantly during the COVID-19 outbreak, causing net debt to go slightly lower.

As Ford repaid most of the borrowings drawn from credit facilities with cash by 2020 4Q, the company’s net debt went higher due mainly to the lower cash reserves.

Ford’s Total Debt to Equity Ratio

Ford debt to equity ratio

Ford debt to equity ratio

* Debt to equity ratio is computed by the author using Ford’s total debt and equity value obtained from the company’s balance sheets.

In terms of leverage, there are several metrics that can be used to measure Ford’s debt leverage.

One of the most used is the debt to equity ratio which is shown in the chart above for the period from 2017 to 2020.

The debt to equity ratio reflects Ford’s debt leverage from the perspective of total debt against total equity or book values of the company.

According to the chart, Ford’s debt to equity ratio rises significantly during 2020 and the ratio reached a record high at 5.7 in 2020 2Q.

The ratio declined slightly to 4.7 in 3Q 2020 and bounced back to 5.25 as of 2020 Q4.

The record high of Ford’s debt to equity ratio during 2020 was driven mainly by the increase in indebtedness.

In 2020, Ford took on extra debt from its credit facilities to prepare for the COVID-19 impacts.

Prior to 2020, Ford’s debt to equity ratio averaged around 4.50.

At a debt to equity ratio of 5.25 reported in 2020 Q4, Ford’s leverage was about $5.25 dollars of debt to $1.00 dollar of equity.

Comparing Ford’s debt to equity ratio with General Motors’ debt to equity ratio, Ford’s leverage was much higher.

In fact, Ford’s debt leverage was more than twice as much as GM’s debt leverage.

Ford’s Total Debt to Asset Ratio

Ford debt to assets ratio

Ford debt to assets ratio

* Debt to assets ratio is computed by the author using Ford’s total debt and total assets obtained from the company’s balance sheets.

The debt to asset ratio shown in the chart above tells us about Ford’s capital structure or debt structure.

The capital structure reflects the ratio of Ford’s total assets being funded by debt and equity.

According to the chart, Ford’s debt to asset ratio shows that the company had a ratio of about 60% prior to 2020.

At this ratio, Ford’s capital structure was made up of 60% debt and 40% other liabilities as well as equity.

However, Ford’s debt to asset ratio ticked higher to 65% in 2020 2Q, driven mainly by the increase in indebtedness during 2020.

Ford’s debt to asset ratio reverted to the 60% level as of 2020 Q4 after Ford repaid most of the borrowings drawn from credit facilities.

From a comparison perspective, GM has a much lower debt structure at only 47% as of 2020 4Q.

Again, Ford’s higher debt to asset ratio shows that the company’s leverage was much higher than that of General Motors.

Ford’s Total Debt to Cash Ratio

Ford debt to cash ratio

Ford debt to cash ratio

* Debt to cash ratio is computed by the author using Ford’s total debt and total cash obtained from the company’s balance sheets.
* Total cash consist of Ford’s cash & cash equivalents, marketable securities, finance receivables and trade receivables.
* The lower the debt to cash ratio, the lower Ford’s debt leverage is with respect to cash.

Another ratio that measures Ford’s debt leverage is the debt to cash ratio.

For your information, Ford’s cash or liquid assets are made up of cash & cash equivalents, marketable securities, finance receivables and trade receivables.

That said, Ford’s total debt to cash ratio has been increasing since 2017, indicating that the company’s debt leverage has been increasing with respect to cash.

As of Q4 2020, Ford’s debt to cash ratio reached about 1.60, one of the new highs for the company.

Ford used to have a debt to cash ratio of only 1.47 back in 1Q 2017.

However, this figure has since been increasing, illustrating Ford’s growing debt load with respect to its cash since 2017.

Ford’s Debt to Revenue Ratio

Ford debt to revenue ratio

Ford debt to revenue ratio

* Debt to revenue ratio is computed by the author using Ford’s total debt and TTM revenue obtained from the company’s financial reports.
* TTM revenue is a GAAP measure and consists of the sum of the quarterly revenue on a trailing 12-month or 4-quarter basis.
* The lower the debt to revenue ratio, the better Ford’s debt utilization is.

With the growing debt levels, has Ford been efficiently using its borrowings?

To figure this out, we look at Ford’s total debt to revenue ratio which is shown in the chart above.

Based on the chart, Ford’s total debt to revenue ratio had remained relatively constant at 1.00 prior to 2020.

At this ratio, Ford’s debt utilization was about $1 dollar of debt to $1 dollar of sales.

In 2020, Ford’s debt to revenue ratio started to go higher and totaled as much as 1.34 in 2Q 2020 before reaching 1.27 as of 4Q 2020.

A growing debt to revenue ratio points to a deteriorating business condition for the company.

In Ford’s case, its revenue is decreasing or its debt is increasing, or both.

In short, Ford is loading itself with more debt but its sales have not increased.

Summary

Is there a cause for concern for Ford’s $160 billion debt load?

Well, we have seen that most of Ford’s $160 billion debt came from its Ford Credit segment.

That said, Ford Credit’s debt made up roughly 85% of the company’s $160 debt as of 2020 4Q.

While Ford Credit may seem like loading itself with loads of debt, the fact is that the majority of the debt was originated from lending services provided by Ford Credit.

In other words, the majority of the debt is asset-backed and is repaid by cash collected from Ford’s finance receivables.

In short, Ford Credit debt is safe and is backed by collateral.

Additionally, Ford’s automotive debt has also declined from its peak level of $40 billion to about $25 billion as of 2020 Q4.

At this level, Ford’s $50 billion cash position is more than enough to cover the automotive debt.

Therefore, there is little cause for concern for Ford’s $160 billion debt load.

References and Credits

1. All financial data in this article were obtained and referenced from annual and quarterly financial statements which can be found in Ford Earnings Releases and Presentations.

2. Featured images in this article are used under creative commons license and sourced from the following websites: IQRemix and Alan Cleaver.

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