The debt portion of a company is often a hot topic that most investors tend to follow. It’s no exception for Ford Motor Company (NYSE:F).
The reason is that debt is the main cause of bankruptcy for most companies.
In this article, we will look at Ford’s total and net debt as well as the debt breakdown to find out which Ford’s business segments are the most indebted.
Additionally, we will also look at Ford’s debt leverage with respect to total equity.
Aside from leverage, the capital structure is another topic that we will zoom at to find out the proportion 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 comparing the company’s total debt with respect to sales or revenue.
Without any delay, let’s move on!
Ford’s Total Debt
The chart above tracks Ford’s total debt in the last 3 years from 2017 to 2020 on a quarterly basis.
Based on the chart, Ford’s total debt increased significantly throughout 2020 and reached a record high at $175 billion as of 2020 Q2.
Prior to 2020, Ford’s total debt had stayed at roughly the same level at slightly above $150 billion.
The increase in Ford’s total debt in 2020 was largely attributed to the COVID-19 pandemic which has caused the Automotive sector to draw on the credit facilities and took on an $8 billion unsecured debt issued in April 2020.
Ford’s Automotive Debt
The chart above shows only Ford’s automotive debt as opposed to the total debt.
As shown, Ford’s automotive debt increased significantly during 2020 by more than 100% and reached nearly $40 billion as of 2020 2Q.
Prior to 2020, Ford’s automotive debt was roughly $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 hit, Ford Automotive drew on 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 impact caused by the COVID-19.
For your information, the pandemic has shuttered the production at most of Ford’s assembly plants.
Ford’s Credit Debt
On the flipped side, Ford Credit’s debt decreased during 2020 and reached only $135 billion by 2020 Q2, well below its historical high.
Prior to 2020, Ford Credit debt averaged around $140 billion.
However, the figure started to decrease in 1Q 2020 to $137 billion and further plunged to $135 billion by 2Q 2020.
The decline in debt for Ford Credit 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 financial arm of Ford, 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 what Ford has said about the impact from the COVID-19 on Ford Credit:
In short, Ford Credit debt increases during a good economic cycle but decreases when the automotive business environment deteriorates.
Ford’s Net Debt
The chart above shows Ford’s net debt over the last 3 years from 2017 to 2020.
Ford’s net debt is measured 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 are convertible to cash almost instantly.
As shown in the chart above, Ford’s net debt increased from about $105 billion in 1Q17 to $120 billion by 1Q19 and stayed at this level throughout 2019.
However, Ford’s net debt declined slightly to $118 billion in Q2 2020, indicating the company’s growing cash on hand during the COVID-19 outbreak, causing net debt to go slightly lower.
Ford’s Total Debt to Equity Ratio
In terms of leverage, there are several metrics that can be used to measure Ford’s debt leverage.
One of which is the debt to equity ratio which is shown in the chart above from 2017 to 2020.
The debt to equity ratio reflects Ford’s leverage in terms 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 roughly 5.5 in 2020 2Q.
The record high of Ford’s debt to equity ratio during 2020 was driven mainly by the increase in indebtedness when Ford drew on extra credits and took on debt to prepare for the COVID-19 impacts.
Prior to 2020, Ford’s debt to equity ratio had only been around 4.50 between 2017 and 2019.
At a debt to equity ratio of 5.5 in 2020 Q2, Ford’s leverage was about $5.50 dollars of debt to $1.00 dollar of equity.
Comparing Ford’s ratio with General Motors’ debt to equity ratio of only 3.0, Ford’s leverage was much higher.
In fact, Ford’s debt leverage was almost twice as much as GM’s debt leverage.
Ford’s Total Debt to Asset Ratio
The debt to asset ratio shown in the chart above tells us about Ford’s capital structure.
The capital structure reflects the proportion 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 total assets were 60% funded by debt, and the rest was made up of other liabilities and equity.
However, Ford’s debt to asset ratio increased to 65% in 2020 2Q, driven mainly by the increase in indebtedness during 2020.
When we compared Ford’s debt to asset ratio with that of GM, Ford’s ratio was slightly higher than GM’s debt to asset ratio of only 50% in 1Q 2020.
Again, the debt to asset ratio shows that Ford’s leverage was much higher than that of General Motors.
Ford’s Liquid Assets to Debt Ratio
Another ratio that tracks Ford’s liquidity with respect to debt is the cash to debt ratio as shown in the chart above.
When measuring Ford’s cash to debt ratio, I have used Ford’s liquid assets instead of cash and cash equivalents alone.
The reason is that Ford has quite a large number of liquid assets that are near cash or cash forms that are convertible to cash almost immediately.
As such, Ford’s liquid assets are made up of cash and cash equivalents, marketable securities, Ford Credit finance receivables and trade receivables.
According to the chart above, Ford’s liquid assets to debt ratio has been going downhill since 2017, dropping to a new low at about 62% in Q2 2020.
At its peak figure, Ford’s liquid assets to debt ratio was at 68% recorded in 1Q17.
However, this figure has since been declining, illustrating Ford’s growing debt load with respect to the company’s liquid assets since 2017.
Ford’s Debt to Revenue Ratio
With the growing debt load, what has Ford been doing with all the borrowings?
The debt to revenue or sales ratio in the chart above can tell us if Ford has used its debt efficiently to grow sales.
Based on the chart, Ford’s total debt to the trailing 12-months (TTM) revenue ratio stayed roughly at the same level of 1.00 prior to 2020.
The ratio started to go higher dramatically in 1Q20 and reached more than 1.30 by 2Q20.
A growing debt to revenue ratio indicates Ford’s declining revenue or an increasing debt load or both.
Nonetheless, Ford’s growing debt to revenue ratio does not bode well for the company’s shareholders.
Whatever the reason is, Ford’s revenue has not grown with respect to the company’s growing indebtedness, underscoring Ford’s efficiency when it comes to utilizing the company’s debt.
In summary, Ford’s total debt has grown tremendously in the last 3 years and reached a new high as of 2Q 2020 to $175 billion.
The growth in debt was driven primarily by Ford’s automotive drawdown on credit facilities and more borrowings in 2020 to deal with the disruption caused by the COVID-19 outbreak.
To increase the company’s liquidity, Ford has resorted to more borrowings, cash in particular, as reflected by the declining net debt in 2Q 2020.
In terms of liquid assets, Ford’s total debt grew at a much faster pace than the company’s total liquid assets as shown by the cash to debt ratio.
Finally, Ford’s debt utilization was at a historical low considering that the debt to revenue ratio has exploded to a new high by 2020 Q2.
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.
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