Profitability
Table 1: Net Income Comparison
Ford Motor Company and General Motor Company are two of America’s most prominent motor vehicle manufacturers. In the fiscal years ended December 2021 and December 2020, both companies posted varied net income results. In 2021, Ford’s net income was 80.36% higher than General Motor Company’s net income. However, in 2020, Ford Motor Company made a loss of $(1,279) million while General Motor Company made a profit of $6,321 million (SEC, 2021). The loss by Ford was attributed to the negative effects of COVID-19, which negatively affected demand.
Working Capital
The working capital represents the operating liquidity available to the two companies. It is calculated by deducting the current liabilities of a company from its current assets (Keown, et al., 2020). The table below shows General Motors and Ford Motors’ working capital for the fiscal year ending December 31, 2021.
Table 2: Working Capital Comparison
From this table, Ford Motor Company’s working capital for the fiscal year ended 2021 was $19.6 billion while General Motor Company’s working capital for the same period was $7.7 billion (SEC, 2021).
Price-Earnings (P/E) Ratio
The Price – Earnings ratio measures how much investors are willing to pay for a company relative to its current earnings. A higher P/E ratio could mean that a company is overvalued, while a lower P/E ratio could mean that a company is undervalued (Keown, et al., 2022). The lower the P/E ratio is, the better for investors and the business. Generally, a P/E ratio of 20-25 is considered the average P/E. The P/E ratio is calculated by dividing the current share price by a company’s earnings per share. The table below shows Ford and General Motor Companies’ P/E ratios.
Table 3: P/E ratio
Based on both companies’ earnings per share for the fiscal year ended 2021 and the current share prices, Ford and General Motor Companies’ P/E ratio is 2.70 and 5.33 respectively.
Debt to Equity Ratio
The debt-to-equity ratio measures to what extent a company can cover its debts. This ratio is calculated by dividing a company’s total debt by its total shareholders’ equity (Keown, et al., 2020). The table below shows the debt-to-equity ratios of General and Ford Motor Companies. The ideal debt-equity ratio is 2 or 2.5 because a higher ratio indicates an increased risk for lenders and investors, as it shows that the company’s growth is financed through borrowing.
Table 4: Debt-Equity Ratio
Table 4 shows the debt-equity ratios of Ford and General Motor Companies, where Ford’s debt-to-equity ratio is 7.67 and General Motors’ is 2.99.
Discussion
From the analysis of Ford Motor Company and General Motor Company’s net income, working capital, P/E ratio, and Debt-Equity ratios, it is apparent that General Motor Company is the better investment. General Motors is the best investment because despite making a higher profit in 2021, it was unable to withstand COVID-19 effects in 2020 and made a huge loss. Additionally, both companies have positive working capital. However, Ford Motors has a lot of current assets that are not optimal for the business. Further, despite both companies having lower P/E ratios, none has reached the recommended ratio of 20-25, indicating that their shares are undervalued. Finally, General Motors’ debt-equity ratio is lower than that of Ford Motors, which presents a limited risk for lenders and investors. Other ratios that could have been utilized include liquidity ratios, such as current and quick ratios; leverage ratios, such as debt-to-asset and debt-to-capital ratios, and profitability ratios, such as the gross margin ratio.
References
Keown, A. J., Martin, J. D., & Petty, J. W. (2020). Foundations of finance: The logic and practice of financial management (10 th ed.). Prentice Hall.
SEC. (2021). General Motor Company – Form 10-K. Securities Exchange Commission, Web.
SEC. (2021). Ford Motor Company – Form 10-K. Securities Exchange Commission, Web.