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Comparative Ratio Analysis: Ford and Nissan | 0

Financial Statement Analysis, FINA 3314

Term Paper/Project: Comparative Ratio Analysis: Ford and Nissan

SECTION 201

Names & ID’s:

Abeer Alghamdi 200900734


Laila Al-Omran 200900296
Razan Al-Sanea 200801164
Comparative Ratio Analysis: Ford and Nissan | 1

Table of Contents

1.1 Introduction…………………………………………………………………...........2

1.2 Objectives of the Comparative Ratio Analysis……………………………....2

1.3 History of The Company ……………..…….…………………….…..…….....3-4

Ford Motor Company Ltd. …………..…….…………………..……..…….....3

Nissan Motor Company Ltd. …………..…….………..…………………….4

2.1 Ratio Analysis…………………………………….………………...........................5

3.1 Findings…………………………………………………….……………………….12

4.1 Conclusion………………………………………………………...………………13
5.1 References …………………………………………………………………………..14
Comparative Ratio Analysis: Ford and Nissan | 2

1.1 Introduction
This project’s report represents all the aspects relating to the ratio analysis of Ford
and Nissan, interpreted according to financial equations. This report information was
gathered by searching and using secondary data such as financial statements. The
important reason behind constructing an analysis is to abstract different information and
data from financial statements either income statement or balance sheet, to predict the
conclusions from those ratios and to simplify accounting data for investors. According to
Hunt, Willant Donaldosa, “Ratios are simply a means of highlighting in arithmetical
terms, of relationship between figures drawn from financial statements.”
Some questions rise from the investor like how to purchase stocks? How to make analysis
for a specific company? How to measure the performance of the company? We found that
by comparing liquidity ratios that how company measure the firm ability to meet cash
needs, Activity Ratios is Measure of how company manage the liquidity of specific assets
and the efficiency of managing assets, Leverage ratios measure the extent of a firm’s
financing with debt relative to equity and its ability to cover interest and other fixed
charges. And profitability ratios measure the overall performance of a firm. That for both
the companies exposes why one company is more efficient in its activity as compared to
the other According to (2010, Fraser L., Ormiston A).

Overall, this report will intend to give knowledge to investors on how to know about the
company’s performance or to calculate the risks and possible gains or loss of an
investment by using ratios.

1.2 Objectives of the Comparative Ratio Analysis


To recognize the financial rival of strengths and weakness between Ford and
Nissan cars companies. Through the Liquidity, Activity, Leverage and Profitability ratios
that give the investor better understanding of the company position in the industry. The
main purpose of using ratio analysis is to determine the financial capability of the
company. Analysis helps investors for forecasting, comparative study, financial
soundness and effective control.
1.3 History of the Company
Ford Motor Company Ltd.:
Comparative Ratio Analysis: Ford and Nissan | 3

 Ford is located in Dearborn, Michigan, a suburb of Detroit. Ford is American


international Carmaker. Ford started by Henry Ford and become will known on
June 16, 1903. Ford manufactures is divide into two categories: cars and
commercial vehicles that brand under Ford name but luxury automobiles under
the Lincoln brand.
 Long time ago Ford manufactured heavy trucks, tractors and automotive
components.
 Ford is Family Company that is managed by their family, and it is recorded on the
New York Stock exchange. Also they have minority rights.
 Ford hire qualified engineers for producing series typified by moving assembly
lines. Ford uses a unique ways for large-scale manufacturing of automobiles and
large-scale managing of an industrial workforce using. By 1914 these procuress
were known globally as Fordism.
 Ford is ranked in 2010 as the second-largest in U.S. and by vehicle sales they
ranked Ford as the fifth-largest worldwide and in Europe.
 Ford increases the employees’ salaries in 2010 but they did not pay bonuses. The
average increase about 2.7% that includes each individual employee's raise in
their salaries. According to Ford spokeswoman Marcey Evans.
 In 2011, Ford has about 164,000 employees that work globally and 70 plants
internationally, and they manufactured 5.532 million cars.
 Ford uses high techniques of technology by dealing with Microsoft to enhance
My Ford touch with new abilities and facilities. And to improve the voice
recognition. Ford predicts the purchases increase depends on the new
technologies.

 Ford's distributor in Saudi Arabia announced in February 2003 that it had sold
100,000 Ford and Lincoln vehicles since commencing sales in November 1986.
According to (Ford Motor Company ,n.d.).

Nissan Motor Company Ltd.:

 Nissan is located in Japan it is international company that originally Japanese. The


company became more independent after it’s reshuffling below Carlos Ghosn
(CEO).
Comparative Ratio Analysis: Ford and Nissan | 4

 In 2010, Nissan is the sixth biggest carmakers globally after Toyota, General
Motors.
 In 2011 Nissan makes sales to 4,845,000 units, increasing annually by 15.8% for
all financial year. At the range of international industry Nissan has achieved 4.2%
that makes them reach 6.4% of market share.
 In 1999, Nissan entered a two ways of union with Renault S.A. of France, which
has ownership about 43.4% of Nissan while Nissan have 15% from Renault
shares, as of 2008. Nissan manufacture luxury models branded as Infiniti.
 Nissan have VQ engines, of V6 configuration; have been featured among Ward's
10 greatest engines for 14 straight years. According to (Nissan Motor Company,
n.d.).
 The second biggest automobiles is Nissan Motor Co., Ltd., Moreover, it has more
than 248,000 workers globally. In 2011, Nissan supplied consumers with more
than 4.8 million cars.
 Nissan is now decreasing the costs by 5% annually, which was done successfully
in 2011, due to our cross-functional monozukuri. Reducing cost not just involved
in cars but also logistics and in-house costs, we have some objectives to reduce it
total costs by 5% each year.

2.0 Ratio Analysis:

2.1 Liquidity Ratios

Liquidity ratio is used to measure how the firm is able to meet cash needs when they arise, and

there are three ratios, which are: current ratio, acid-test ratio, and average collection period

1. Current ratio = current assets/current liabilities

Ford’s current Ratio (2011) = = 1.16 times.


Comparative Ratio Analysis: Ford and Nissan | 5

Nissan’s current Ratio (2011) = = 1.44 times

2. Acid test-ratio = current assets-inventory/current liabilities

Ford’s acid-test Ratio (2011) = = 0.98 times

Nissan’s acid-test Ratio (2011) = = 1.22 times


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3. Average collection period = net account receivable/ average daily sales

Ford’s Average collection period Ratio (2011) = = 12.01 days

Nissan’s Average collection period Ratio (2011) = = 30.74 days


Comparative Ratio Analysis: Ford and Nissan | 7

2.2 Activity Ratios

Activity ratio is important to evaluate the liquidity of specific assets, and how efficient the

management is using assets to generate profit.

1. Fixed assets turnover = net sales/fixed assets

Ford’s fixed assets turnover (2011) = = 8.41 times

Nissan’s fixed assets turnover (2011) = = 2.41 times

2. Total assets turnover = net sales/total assets

Ford’s total assets turnover (2011) = = 0.71 times

Nissan’s total assets turnover (2011) = = 0.81 times


Comparative Ratio Analysis: Ford and Nissan | 8

2.3 Leverage Ratio

Leverage ratio is used to measure the firm’s financing with dept relative to equity. And there are

three ratios, which are: debt ratio, debt to equity and times interest earned.

1. Debt ratio = total liabilities/total assets

Ford’s debt ratio (2011) = = 91.59%

Nissan’s debt ratio (2011) = = 69.50%


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2. Debt to equity = total liabilities/ stockholders’ equity

Ford’s debt to equity ratio (2011) = = 10.89 times

Nissan’s debt to equity ratio (2011) = = 1.87 times


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3. Times interest earned = operating profit/ interest expenses

Ford’s Times interest earned ratio (2011) = = 1.30 times

Nissan’s Times interest earned ratio (2011) = = 18.95 times

2.4 Profitability Ratios

Profitability ratio calculates the overall performance and efficiency of the firm in managing its

assets, liabilities, and equity.

1. Net profit margin = net earning/net sales

Ford’s Net profit margin ratio (2011) = = 15.77 %

Nissan’s Net profit margin ratio (2011) = = 3.63%


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2. Return on equity (ROE) = net earnings/stockholders’ equity

Ford’s Return on equity (ROE) ratio (2011) = = 134 %

Nissan’s Return on equity (ROE) ratio (2011) = = 8.01 %


Comparative Ratio Analysis: Ford and Nissan | 12

3.1 Findings

We started off calculating the current ratio; it is used to measure short run
solvency and ability for the firm to meet its debt requirements. We found that Nissan’s
Current Assets covered its Current Liabilities is 1.44 times, which makes it better that
Ford which fell behind reach 1.16 times. Moreover, Quick Ratio also called Acid Test
Ratio measures the short run solvency it is better and more accurate that current ratio,
because it eliminates inventory. Nissan’s Current Assets minus the Inventory covers 1.22
times the debt (Current Liabilities) when ford only covers 0.98 times. The last measure of
liquidity we calculated was the average collection period of accounts receivable, it’s the
average number of days required to convert receivables into cash. Fords average
collection period its 12 days which makes it highly liquid and even better than Nissan’s
which records as 31 days.

For the Activity Ratio, we first calculated fixed Asset Turnover ratio which
considers only the firms investments in plant property and equipment. As the book states,
the higher the ratio the smaller the investment required to generate sales thus the more
profitable the firm. Ford fixed asset ratio states that for each dollar worth of fixed assets
the firm generates sales of $8.4 which equals to 8.4 times, while Nissan only generates
2.41 times. On the other hand, in the Total Asset Turnover, Nissan was able to generate
for every dollar worth of total assets 0.81 cents when Ford only generate 0.71 cents.

As for the Leverage Ratio, we started off with the debt ratio as the results were
91% for Ford and 69% for Nissan. This means if Ford has a dollar worth of total assets
they are financing 0.91cents from borrowing, when Nissan is financing for every dollar
worth of total assets 0.69 cents from borrowing. Nissan is less risky in this case, because
high percentage of borrowings leads to high risk. Ford pays for every $1 of equity 0.10
cents in debt, while Nissan pays 0.018. Finally we calculated the interest generated from
operations Nissan was at lead making 18.95 times paid interest from operations when
Ford made only 1.30 times interest.

Last but not least we calculated Profitability Ratios; we started with net profit
margin and ended with return on equity. First starting with net profit margin, for every
Comparative Ratio Analysis: Ford and Nissan | 13

dollar ford makes sales it generates 0.15 cents net income when Nissan only makes 0.03
cents. Finally for every dollar of stock holder’s equity Ford earns $1.34 net income when
Nissan earns 0.08 cents net income. Which lead to a conclusion that Ford is really risky
therefore offers high return.

4.1 Conclusion

Ratio analysis is a significant method that is broadly applied for understanding


financial statements. The whole public image of companies attracts investors and makes
them highly competitive. It is possible for big companies like Ford and Nissan to get
investors to make investment just by looking of the brand name. On the other hand, now
investors concern more about the ratio analysis to decide where to invest. Using ratios
have many advantages such as to predict the future that helps manager to calculate the
numbers of years and makes plans. Ratios are important for coordination that is valuable
in business. It can be very useful to management to correct their weakness and develop
their strengths. It is also important for investors to make a path for communication
between them and the company. By using ratios, that gives the investor the ability to
compare between various financial statements. In addition, employees, financial
institutions, and investors can easily determine the weak and strong position by making
comparative analysis to financial statements.

Undoubtedly, ratio analysis in this report makes it easier to measure the firm’s
position and see their strengths, liquidity situations and operating of the whole firm. For
each ratio investors can understand different things about the investment conditions and it
efficiency. Ratios give the investors a brief detailed summary for makes decisions.

Investors should make sure from the financial data that all of them are accurate,
that will give him/her clear image of the company. Both the firms are achieving an
excellent return on capital employed which is great indication of growth. They are also
trying to maintain a good return on assets.
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5.1 References:

Ford Motor Company. (n.d.). In Wikipedia. Retrieved November 27, 2012, from
http://en.wikipedia.org/wiki/Ford_Motor_Company

Ford white-collar workers to get pay raise and bonus (2012). Retrieved November 27,
2012 from
http://money.cnn.com/2012/01/19/news/companies/ford_pay_raises/index.htm

Fraser L., &Ormiston A. (2010). Understanding Financial Statements. (9th ed.). New
Jersey.

Nissan Motor Company. (n.d.). In Wikipedia. Retrieved November 27, 2012, from

http://en.wikipedia.org/wiki/Nissan_Motor_Company

Nissan Reports First Half FY12 Financial Results. (2012) Retrieved November 27, 2012,
from http://www.nissan-global.com/EN/NEWS/2012/_STORY/121106-01-e.html