Does Ford Motor (NYSE:F) Have a Healthy Balance Sheet? | Rare Techy
Warren Buffett famously said, “Volatility is far from synonymous with risk.” So it seems that smart money knows that debt, which is usually associated with bankruptcy, is a very important factor in valuing a company as risky. As with many other companies Ford Motor Company (NYSE: F ) uses debt. But the more important question is: how much risk does this debt pose?
When is debt a problem?
Debt is a tool that helps businesses grow, but if a business can’t repay its lenders, it exists at their mercy. If things go really bad, lenders can take control of the business. A more common (but still costly) situation is where a company must dilute shareholders with a cheap stock price just to get debt under control. However, by replacing dilution, debt can be a very good tool for companies that need capital to invest in growth with high returns. When we think about a company’s use of debt, we first look at cash and debt together.
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What is Ford Motor’s debt?
As you can see below, Ford Motor had $128.3 billion in debt as of September 2022, up from $144.6 billion a year earlier. However, with the company’s cash reserves of US$32.0 billion, its net debt is lower at approximately US$96.4 billion.
How strong is Ford Motor’s balance sheet?
From the latest balance sheet, we see that Ford Motor had US$90.2 billion in liabilities during the year and US$114.7 billion after that. Offsetting these liabilities, it had USD 32.0 billion in cash and USD 14.8 billion in receivables due within 12 months. So its liabilities outweigh its cash and (short-term) receivables by US$158.1 billion.
The shortfall here weighs heavily on the US$56.4 billion company itself, like a child struggling under the weight of a huge backpack full of books, sports equipment and a trumpet. So we definitely think shareholders need to watch this closely. Ford Motor would probably need a major recapitalization at the end of the day if creditors were to demand repayment.
We use two key ratios to inform us of the level of debt to income. The former is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the latter shows how many times its earnings before interest and taxes (EBIT) cover interest expense (or interest coverage for short). . In this way, we take into account both the absolute amount of the debt and the interest rates paid on it.
As it happens, Ford Motor has a rather worrying net debt to EBITDA ratio of 5.8, but a very strong interest coverage ratio of 10.6. So he has access to very cheap long-term debt or the interest costs go up! Pleasingly, Ford Motor is growing its EBIT faster than former Australian Prime Minister Bob Hawke, up 179% in the last twelve months. There is no doubt that we learn the most about debt from the balance sheet. But future earnings will primarily determine Ford Motor’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future, you can watch it for free a report showing analysts’ earnings forecasts.
Finally, a company needs free cash flow to pay its debts; accounting profits just won’t cut it. So we need to clearly see if this EBIT leads to a corresponding free cash flow. Over the past two years, Ford Motor generated free cash flow of a very strong 92% of EBIT, which is more than we expected. This puts him in a very strong position to pay off his debts.
We have some concerns about the severity of Ford Motor’s total liabilities, but we also have some positives to focus on. For example, converting EBIT to free cash flow and the growth rate of EBIT gives us some confidence in our ability to manage our debt. Looking at all the perspectives mentioned above, we do feel that Ford Motor is a somewhat risky investment due to its debt. Not all risks are bad, as they can increase share price returns if they pay off, but this debt risk is something to keep in mind. When analyzing debt levels, the balance sheet is an obvious place to start. But ultimately, any business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every company has them and we’ve noticed 2 warning signs for Ford Motor (of which 1 should not be overlooked!) you should know.
When all is said and done, sometimes it’s easier to focus on businesses that don’t even need debt. Readers can access a list of growth stocks with zero debt 100% freeright now.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using an unbiased methodology, and our articles are not intended to constitute financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our goal is to bring you long-term focused analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.