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Analyzing Ford’s Margins With Only 4 Ratios

Ford Headquarters, Dearborn, MI. Source: Flickr Image

This article explores Ford Motor (NYSE:F) margins with only 4 ratios, and they are gross margin, operating margin, earnings before taxes (EBT) margin and net profit margin.

We will look at these margins from a historical perspective and find out how they have changed over several quarters.

Of course, the higher the margins, the more profitable the metrics are.

For instance, a high gross margin illustrates the pricing power of a particular product, and possibly the moat or a monopoly the product has over its competitors.

Additionally, the margins that are laid out in the following discussion are based on the Generally Accepted Accounting Principles (GAAP) standard disclosed in Ford’s financial statements.

Therefore, just sit tight and read on!

Ford’s Automotive Gross Margin (Quarterly)

Ford automotive gross margin (quarterly)

Ford automotive gross margin (quarterly)

The chart above shows Ford’s automotive gross margin over the previous 3 years on a quarterly basis.

Ford’s automotive gross margin tells us about the company’s gross profitability of its automotive segment, and indirectly, the moat of its automotive sector.

As mentioned, a high gross margin implies a moat or a monopoly that a company has over its competitors, which can range from brand power to quality products that the company produces.

A wide moat gives a company an incredible power to put higher price tags on its products, and thus, leading to greater profitability.

According to the chart, Ford’s automotive gross margin was the highest at about 10% reported in 1Q 2017.

Since then, Ford’s automotive gross margin has been gradually slipping and even turned negative in 2020.

As of 2Q 2020, Ford reported an automotive gross margin of -8%, a new low since 2017, according to the chart.

At a gross margin of -8%, Ford was selling its automotive products at below costs, meaning that the company was selling at a loss since the costs of sales were higher than the sale price.

In Ford’s case, the real culprit was a significant drop in shipment volumes, leading to a higher cost of production.

Ford’s Automotive Gross Margin (TTM)

Ford automotive gross margin (ttm)

Ford automotive gross margin (ttm)

To smooth out the quarterly curve, I have created the trailing 12-months (TTM) plot above which clearly shows the trend of Ford’s automotive gross margin over the last 3 years.

From a TTM standpoint, Ford’s automotive gross margin has been declining since 2017 and reached close to 2% in 2020 Q2, a new low in the last 3 years.

A declining gross margin can mean a few things.

One of the most obvious reaons is that Ford has no moat or monopoly in the automotive sector.

When a deteriorating business environment hits, Ford has to lower the pricing of its automotive products in order to push sales, thereby leading to a lower gross margin.

Additionally, Ford may not be able to increase the pricing of its automotive products even when the costs of production go up.

If Ford increased prices, customers may go to its competitors.

As such, Ford has decided to keep its sale price (adjusted for inflation) unchanged and sold its products below costs, as reflected by the decreasing automotive gross margin over time since 2017.

Clearly, Ford’s automotive costs of sales has increased at a much faster pace than the company could adjust the pricing.

Unless Ford’s brand is superb and sticky, Ford’s customers will go to its competitors when they can produce vehicles with the same specifications but at much lower price points.

Ford’s Operating Margin (Quarterly)

Ford operating margin (quarterly)

Ford operating margin (quarterly)

The chart above shows Ford’s operating margin between 2017 and 2020 on a quarterly basis.

Ford’s operating margin explores the company’s operating strength and thus, the operating profitability. The metric takes into account of all Ford’s operating costs and expenses.

The operating margin is also one of the most important metrics, giving investors a quick view of the strength of a company’s core business.

In Ford’s case, its core businesses are the automotive segment, the mobility segment and the financial segment of the company, Ford Credit.

From the operating margin, investors can find out how strong and directly, profitable Ford’s core businesses are over certain financial periods.

The operating margin excludes other variables that are not related to core businesses such as interest expenses and taxes as well as gains or losses from investments and sales of assets.

Based on the chart above, Ford’s operating margin has also been sliding indiscriminately in the last 3 years, reaching as low as -14% in 2020 2Q.

Even at its best, Ford’s operating margin has only been 4% reported in 2017, implying the low profitability of its operating segment.

At an operating margin of 4%, Ford retains about 4 cents as operating income out of $1 dollar of revenue.

Ford’s Operating Margin (TTM)

Ford operating margin (ttm)

Ford operating margin (ttm)

Similarly, the TTM plot above clearly shows the decline of Ford’s operating margin between 2017 and 2020.

On a TTM basis, Ford’s operating margin may not be as worse as its quarterly figures. However, it was still pretty awful at -4% reported in Q2 2020, a new low since 2017.

At an operating margin of -4% reported in 2020 2Q, Ford has operated at a loss in the last 12 months, due partially to the COVID-12 disruption which started in 2020, causing Ford to temporarily shutter some of its manufacturing plants throughout 2020.

Even before the arrival of the COVID-19 outbreak, Ford’s operating margin has already started to slip and reach less than 1.0% by the end of 2019, indicating that weaknesses have already emerged way before the pandemic.

Ford’s Earnings Before Taxes Margin (Quarterly)

Ford earnings before tax margin (quarterly)

Ford earnings before tax margin (quarterly)

In terms of earnings before taxes (EBT), Ford Motor’s margins have swung wildly in the last 3 years, turning from negative to positive in a matter of a quarter or two, particularly during 2020.

The reason for the wild swing in EBT margins can be attributed to other incomes or losses that Ford obtains from sources not related to any of its core businesses.

For example, Ford’s EBT margin shot up to as high as 6% in Q2 2020. The improvement in Ford’s EBT margin in Q2 2020 was largely driven by the investment gain of more than $3 billion in Argo AI and Volkswagen AG.

In other words, these incomes or losses are mostly one-time events that are not sustainable in the long term.

Ford’s Earnings Before Taxes Margin (TTM)

Ford earnings before tax margin (ttm)

Ford earnings before tax margin (ttm)

From a TTM perspective, Ford’s EBT margins have been going downhill since 2017 and reached -2.0% in 2Q 2020, even with the huge investment gain of $3 billion reported in 2Q 2020.

Without the investment gain in Argo AI, Ford’s earnings before tax margin would have gone even lower, illustrating just how bad Ford’s margins were in 2020.

Ford’s Net Profit Margin (Quarterly)

Ford net profit margin (quarterly)

Ford net profit margin (quarterly)

Ford’s net profit margin is similar to the EBT margin.

The only item that is in between Ford’s net profit and earnings before taxes is the provision for or benefit from income taxes.

The income or loss attributable to non-controlling interests, which is also another item that is measured before Ford’s net profit has been insignificant.

For this reason, Ford’s net profit margin should not differ much from the EBT margin.

As seen from the chart, Ford’s net profit margin stood at 6% in 2020 2Q, which was about the same as the EBT margin reported in the same quarter.

Ford’s Net Profit Margin (TTM)

Ford net profit margin (ttm)

Ford net profit margin (ttm)

On a TTM basis, Ford’s net profit margin plot looks exactly the same as its EBT counterpart.

As of 2020 Q2, Ford’s net profit margin stood at -1.6%, which was about the same as its EBT margin in the same quarter.

However, the 2020 Q2 figure was slightly better than the reported net profit margin of -2.1% in 2020 Q1.

As mentioned, Ford’s improvement in net profit margin in 2020 Q2 was mainly driven by the investment gain in Argo AI and Volkswagen AG, which was a one-time event that cannot be sustained in the long term.

Conclusion

From the analysis of Ford’s margins, including the gross margin, operating margin, EBT margin and net profit margin, investors should only be concerned about the company’s gross margin and operating margin.

The gross margin and operating margin are the only 2 margins that measure the viability of Ford’s core businesses, namely its automotive segment, mobility segment and financial arm of the company.

Moreover, the gross margin and operating margin discussed in this article are based on the GAAP standard and include all costs and expenses that Ford’s businesses have incurred in a financial period.

For the rest of the margins such as the EBT and net profit margin, investors should treat these margins with a grain of salt and investigates thoroughly the income statements about the gains as well as the losses obtained from other sources.

Finally, Ford’s margins, from gross margin to net profit margin, have all been declining since 2017, plunging to the negative territory throughout 2020, on both quarterly and TTM basis.

The plummetting margins indicate the challenging business environment that Ford has been going through even before the arrival of the COVID-19 outbreak.

The COVID-19 outbreak has made doing business even more difficult for Ford, as reflected by the further plunge of all margins in 2020.

References and Credits

1. All financial figures in this article were referenced and obtained directly from Ford’s annual and quarterly filings available in Ford Investors Relation.

2. Featured images in this article are used under Creative Commons License and sourced from the following websites: Ford Headquarters and Ford River Rouge Complex.

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