Analyzing Ford's Return on Equity (ROE)

By Jeremiah Strider | December 10, 2015 

Ford ’s (NYSE: F) recent return on equity (ROE) tells investors that the company is creating measurable net income for its stockholders. Although Ford may have been the only auto manufacturer that did not take government bailout dollars during the financial crisis of 2008 and 2009, it nonetheless suffered significantly during those years. In fact, like the other large U.S. automakers, Ford’s equity balance was substantially below zero during those years and the years that followed. Essentially, the company owed more than its assets were worth; therefore, there was no shareholders' equity on the balance sheet. That negative equity, along with several years of net operating losses, made the company's ROE unsuitable to consider for several years. There simply cannot be a return on shareholders' equity when there is no equity. In 2011, Ford's shareholder equity and ROE turned positive, ending at 281.62%, a number that was skewed by the equity balance being extremely low and having the highest annual net income for the past 10 years at $20.3 billion.

Recent Three Years

For the most recent three calendar years of 2012 to 2014, Ford's ROE has been 36.58%, 33.81% and 12.45% respectively. Net income during those same years was $5.6 billion, $7.2 billion and $3.2 billion respectively. The ROE does not correlate to the net income trend because Ford also raised its dividend during each of those years: from 0 in 2011, gradually increasing up to 50 cents per share by the end of 2014. While this is generally viewed as a sign of strength to investors, it may skew the equity calculations and make the yearly ROE difficult to compare. Ford has also bought back a small portion of company shares during recent years, decreasing shares outstanding from 4.1 billion in 2011 to 4 billion in 2014.

Comparison to Competition

Ford Motor Company, ’s largest domestic competitor in the highly consolidated automotive manufacturing industry is General Motors, which also experienced years of negative shareholder equity during the economic downturn but returned to positive figures in 2010. During the same most recent three-year period of 2012 to 2014, GM's ROE has been 18.14%, 11.54% and 7.48% respectively. Net income during those same years was $6.1 billion, $5.3 billion and $3.9 billion respectively. GM returned to paying dividends in 2014 after several years of none, paying an average of $1.20 per share that year. GM's shares outstanding has remained relatively level during recent years with no major share repurchases or new share issuance.

The two companies are relatively close in overall size; GM generates more annual revenue than Ford, but Ford has more overall assets than GM. Ford also has carried more long-term debt than GM in recent years. Both companies' ROEs indicates that they have returned to more stable economic footing and that they are beginning to reward shareholders reliably for their investments through dividends. Both companies' stock prices have also recovered from severe lows during the economic recession.

Other Considerations

The amount of new debt a company takes on is often a factor that an investor should consider in addition to an ROE analysis. Although Ford carries a higher amount of debt compared to its competition, it has not substantially increased that debt in the last three years. This indicates that its capital needs are not being met via debt financing, which often skews an ROE analysis.

Ford’s annual revenues have returned to their highest level since the recession, but they are still substantially lower than annual revenues before the recession. However, it appears as though the company is learning how to manage its assets and shareholders' equity at this new level as demonstrated by the return to positive ROE figures posted in each of the past three calendar years.

 

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