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Is Ford’s $129 Billion Debt A Cause For Concern?

Edmonton Motor Show 2017. Source: Flickr Image

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

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 asset 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.

Apart from that, we also will explore 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.

Lastly, we will drill into the relationship between Ford’s debt and revenue to find out how the latter has changed with respect to the growing debt levels.

Without any delay, let’s move on!

Ford’s Total Debt

Ford total debt

Ford total debt

* Total debt is a GAAP measure and consists of the sum of debt (short and long-term portions) that comes from Ford automotive and Ford Credit.
* Ford automotive is also referred to as Total Company which consists of all subsidiaries excluding Ford Credit.
* Ford’s fiscal year begins on Jan 1 and ends on Dec 31.

According to the chart, Ford’s total debt has been mostly flat in the last 6 years except for the period in fiscal 2020 in which the company significantly racked up debt to maintain liquidity when the COVID-19 pandemic first hit.

As of fiscal 2Q 2022, Ford’s total debt came in at $129 billion USD, down roughly 12% from a year ago and was the lowest since fiscal 2020.

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 and Ford Credit’s debt obtained directly from the company’s consolidated balance sheets.
* Ford automotive is also referred to as Total Company which consists of all subsidiaries excluding Ford Credit.
* Ford’s fiscal year begins on Jan 1 and ends on Dec 31.

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.

For your information, Ford’s automotive segment is also referred to as the Total Company excluding Ford Credit and consists of all subsidiaries other than Ford Credit.

As shown in the chart, Ford Credit’s debt contributes to the biggest portion of the company’s total debt, notably at over 80% as of fiscal 2022 Q2.

In the same quarter, Ford Credit’s debt totaled $109 billion compared to only $19 billion for Total Company excluding Ford Credit.

Ford’s Automotive Debt

Ford Automotive debt

Ford Automotive debt

* Automotive debt is a GAAP measure and consists of debt from all subsidiaries excluding Ford Credit.
* Ford’s fiscal year begins on Jan 1 and ends on Dec 31.

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 only $15 billion, a far lower figure compared to the elevated figure reported in fiscal 2020.

When the COVID-19 pandemic first arrived, 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 credit facilities was meant to help Ford to maintain financial flexibility during the COVID age.

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

By the 4th quarter of 2020, Ford has repaid most of the debt drawn from its credit facilities, and the debt figure reached only $19 billion as of fiscal 2Q 2022, down 27% from a year ago.

Ford Credit’s Debt

Ford Credit debt

Ford Credit debt

* Ford Credit debt is a GAAP measure and consists of Ford Credit’s unsecured and asset-backed debt.
* Ford’s fiscal year begins on Jan 1 and ends on Dec 31.

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 2nd quarter of 2022, Ford Credit’s debt had further declined to $109 billion, down 12% from a year ago.

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

Therefore, Ford Credit’s debt is at its lowest level as of fiscal Q2 2022.

The decline in Ford Credit’s debt in fiscal 2020 and further in fiscal 2021 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 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 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.

So, is the decline in Ford Credit’s debt a piece of bad news for investors as the firm is originating fewer loans?

To figure this out, we have to look precisely at the portion of Ford Credit’s debt that has declined the most.

Ford Credit’s Debt Breakdown

Ford Credit's debt breakdown

Ford Credit’s debt breakdown

* Ford Credit’s debt breakdown consists of short-term loan, unsecured and asset-backed debt.
* Ford’s fiscal year begins on Jan 1 and ends on Dec 31.

As shown in the chart above, Ford Credit’s debt is made up of 3 major categories which are short-term loans, unsecured debt and asset-backed debt.

As the name implies, short-term loans are current debt and are to be paid back within a year.

Unsecured debt can be both short and long-term but they are unsecured and do not need collateral for the borrowings.

On the other hand, asset-backed debt is a type of secured loan and is repaid only from cash collected from securitized assets.

The following snapshot shows the assets and liabilities part of the asset-backed loans.

Ford Credit's asset-backed debt

Ford Credit’s asset-backed debt

As seen in the snapshot above, the assets portion is much greater than the liability portion of the asset-backed debt.

As a result, Ford Credit’s asset-backed loans are usually pretty safe in the sense that the assets that support these loans are readily available.

Unlike unsecured loans, Ford Credit’s asset-backed loans are repaid only from cash generated from the respective assets, ie. finance receivables and operating leases.

On the flipped side, Ford needs to use the cash generated from business operations to repay the unsecured loans.

According to the chart above, Ford Credit’s asset-backed debt totaled about $46 billion USD as of fiscal Q2 2022 and this figure constitutes about 36% of Ford Credit’s total debt.

While asset-backed debt has declined, Ford Credit’s unsecured loans and short-term loans have declined at a much faster rate as seen in the chart above.

As of fiscal Q2 2022, Ford Credit’s unsecured debt totaled only $50 billion, the lowest level that has ever been reported since fiscal 2017 while short-term debt came in at only $14 billion, also lower than its historical high.

On a long-term basis, both of these loans have been on a decline, meaning that Ford Credit has been deleveraging itself off of this unsecured debt.

Ford’s Net Debt

Ford net debt

Ford net debt

* Net debt is computed by the author and consists of the difference between Ford’s unsecured debt and liquid assets such as cash and marketable securities.
* Ford’s fiscal year begins on Jan 1 and ends on Dec 31.

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

Ford’s Net Debt = Unsecured Debt – Cash – Marketable Securities

Unsecured debt consists of the portions from Ford automotive and Ford Credit excluding asset-backed loans.

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 averages around $60 billion after accounting for the cash.

As of fiscal 2Q 2022, Ford’s net debt totaled $47 billion, a 22% lower from a year ago.

While a decline in net debt usually bodes well for the company, we still have to look at the leverage ratio.

To figure this out, we have to look at the net debt leverage with respect to equity.

Ford’s Net Debt To Equity Ratio

Ford debt to equity ratio

Ford debt to equity ratio

* Debt to equity ratio is computed by the author based on Ford’s net debt and shareholders’ equity obtained from the company’s consolidated balance sheets.
* Ford’s fiscal year begins on Jan 1 and ends on Dec 31.

The debt to equity ratio measures Ford’s debt leverage from the perspective of net debt against shareholders’ equity or book values of the company.

As seen from the chart, Ford’s net debt to equity ratio rises significantly during fiscal 2020 and the ratio reached a record high at 2.2X in 2020 1Q.

In subsequent quarters, Ford’s net debt to equity ratio has been on a decline and reached only 1.1X as of fiscal 2Q 2022, the lowest figure ever seen in the last 5 years, illustrating that Ford’s leverage has been on a decline.

At a debt-to-equity ratio of 1.1X reported in the latest quarter, Ford’s leverage was considered low as the net debt was only slightly higher than equity.

For example, Ford’s net debt would come to about $1.10 dollars for every $1.00 dollar of equity.

Comparing Ford’s debt to equity ratio with General Motors’ debt to equity ratio, GM’s leverage was slightly lower.

In the past, Ford’s debt leverage was twice as much as GM’s debt leverage.

As of 2022, GM’s net debt came in at $42 billion, and total equity of $68 billion in the same quarter, thereby giving a net debt to equity ratio of only 0.62X.

Ford’s Total Debt To Assets Ratio

Ford debt to assets ratio

Ford debt to assets ratio

* Debt to assets ratio is computed by the author based on Ford’s total debt calculated earlier and total assets obtained from the company’s consolidated balance sheets.
* Ford’s fiscal year begins on Jan 1 and ends on Dec 31.

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 fiscal 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 increased significantly higher to 65% in fiscal 2020 2Q, driven mainly by the increase in indebtedness during 2020.

As of fiscal 2022 Q2, Ford’s debt to asset ratio retreated to 52% after Ford repaid most of the borrowings drawn from credit facilities.

The result shows that Ford’s total debt level has actually dropped with respect to assets.

From a comparison perspective, GM has a much lower debt structure at only 43% as of 2022 2Q.

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 Revenue Ratio

Ford debt to revenue ratio

Ford debt to revenue ratio

* Debt to revenue ratio is computed by the author based on Ford’s total debt calculated earlier and TTM revenue obtained from the company’s consolidated income statements.
* TTM revenue is the sum of the quarterly revenue on a trailing 12-month or 4-quarter basis.
* The lower the debt to revenue ratio, the better the result.
* Ford’s fiscal year begins on Jan 1 and ends on Dec 31.

Is Ford using its debt effectively?

The total debt to revenue ratio should give us a clue about Ford’s debt efficiency.

Based on the chart, Ford’s total debt to revenue ratio had remained relatively constant at 1.00X prior to fiscal 2020 or before the arrival of COVID.

At this ratio, Ford managed to generate $1 dollar of sales from $1 dollar of debt.

However, in fiscal 2020, Ford’s debt to revenue went significantly higher and totaled as much as 1.34X in 2Q 2020 before retreating to 1.27X in 4Q 2020.

A growing debt-to-revenue ratio indicates either a deteriorating revenue or surging debt for the company.

Therefore, in either case, it did not bode well for the financial health of the company.

Luckily, Ford’s total debt to revenue ratio declined in fiscal 2021 and clocked at 0.9X as of fiscal Q2 2022.

This ratio was the lowest in the last 6 years and was even lower than the figure recorded prior to the COVID-19 period.

The declining ratio means that either Ford’s revenue has been surging or the debt has been on a decline.

In this case, we are seeing that Ford’s debt has been on a decline.

Summary

Is there a cause for concern for Ford’s $129 billion debt load?

Well, we have seen that most of Ford’s $129 billion debt came from its Ford Credit segment.

That said, Ford Credit’s debt made up roughly 80% or $109 billion of the company’s $129 billion debt as of 2022 2Q.

While Ford Credit may seem like loading itself with loads of debt, the fact is that a portion of the debt, 36% to be exact as of fiscal 2Q 2022, was originated from lending services provided by Ford Credit.

In other words, these are asset-backed loans and are repaid only by cash collected from Ford’s securitized assets such as finance receivables and operating leases.

The rest of Ford Credit’s debt is unsecured loans and has to be paid back by cash generated from business operations.

While the majority of Ford Credit’s debt is unsecured, we saw that the company has been reducing its unsecured debt as reflected in the debt breakdown.

In addition, Ford’s net debt came to about $47 billion as of fiscal Q2 2022 after accounting for cash and marketable securities.

At this level of debt, Ford’s leverage came to about 0.9X with respect to equity in fiscal 2Q 2022, the lowest ratio we have ever seen.

I believe this level of leverage is low.

Moreover, this ratio has been on a decline in the last 5 years, meaning that Ford has been deleveraging over the years.

Similarly, Ford’s automotive debt also retreated in fiscal 2022.

Since most of Ford’s debt has declined and the leverage ratio also was at its lowest level, there should not be a lot of concerns regarding Ford’s debt as of fiscal 2Q 2022.

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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Disclosure

The content in this article is for informational purposes only and is neither a recommendation nor a piece of financial advice to purchase a stock.

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