Is It Bad News for Investors That Ford Motor Company's Debt Will Continue to Increase?

It appears as though Ford's total debt level is going to continue climbing higher, as it has since 2011; but, is that a bad thing?

Jul 15, 2014 at 6:06PM

When comparing certain metrics across automakers, it becomes quickly apparent how much debt Ford Motor Company (NYSE:F) has accumulated. At the end of 2013, Ford's debt to equity ratio was 4.34; that's staggeringly high compared to General Motors' ratio of 0.85, or Toyota and Honda's respective ratios of 1.12 and 0.99.

Moreover, as of the first quarter, Ford's total debt of $117 billion was $23 billion more than General Motors' and Honda's total debt, combined. Simply put, Ford has a massive amount of debt, and it's most likely going to move even higher in the years ahead. 

Here's the kicker, though: Ford's use of the large debt pile is actually one of the most profitable things it does!

Break it down
Sure, merely glancing at the total figure would show that Ford has a mountain of debt. Savvy investors, though, need to take it a step further and break out the total debt into two entities: financial and automotive. From that perspectivet, Ford's automotive debt is no longer likely to cause heart attacks when investors are skimming financial ratios.

Chart by author. Source: Ford's SEC filings.

The financial sector accounts for a massive amount of Ford's total debt. When only Ford's automotive debt is included in its debt to equity ratio, the figure drops drastically from 4.34 to 0.59, as recorded at the end of 2013 -- much more comparable to its industry counterparts.

Some of you are likely asking, "What does it matter where the debt comes from?" After all, a ton of debt is still bad, right?

Not exactly; Ford's credit division acts as a bank to help finance purchases worldwide. Among other things, Ford Credit takes on massive amounts of debt and dishes it back out as loans to consumers at a higher interest rate and makes a healthy profit over time.

Money, money, money!
In fact, Ford Credit is one of Ford's most profitable entities. Ford Credit has been more profitable for the automaker than any other segment outside of its North America one. If you follow Ford closely as an investment, you already know that its operations in Europe have been a huge drag on earnings -- Ford has lost more than $3.5 billion in Europe since the beginning of 2012. However, did you know that Ford Credit has completely offset those losses?

Chart by author. Information source: Ford's SEC filings.

Ford Credit is a competitive advantage that no other major automaker can match, and it's well worth the debt load that it must carry. As Ford Credit continues to expand its business, Ford's total debt will likely rise in the years ahead; however, this climb in total debt will actually mask a positive development in Ford's automotive debt.

Although Ford's automotive debt has slightly increased over the last couple of years, management has set a goal of reducing this debt to $10 billion by the end of 2015. Here's how that would look:

2014 and 2015 auto debt levels estimated from management guidance. Source: Ford's annual reports.

Bottom line
Ford's debt situation reminds me of the old saying, "Don't judge a book by its cover." While Ford's total debt is insanely high compared to other automakers', it's actually a very profitable situation for Ford. Also, as its total debt figure continues to climb, investors should keep in mind that the company plans to reduce automotive debt by one-third by the end of next year. As it continues its resurgence in the automotive industry, a strengthening balance sheet is just one more reason to put Ford on your watch list. 

What technological shift is Ford calling "fantastic"?
A major technological shift is happening in the automotive industry. Most people are skeptical about its impact. Warren Buffett isn't one of them. He recently called it a "real threat" to one of his favorite businesses. An executive at Ford called the technology "fantastic." The beauty for investors is that there is an easy way to invest in this megatrend. Click here to access our exclusive report on this stock.

Daniel Miller owns shares of Ford. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers