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

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.


Read/Post Comments (9) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 15, 2014, at 9:41 PM, mds wrote:

    And in the meantime they took no bailout money whatsoever.

    Get off their backs and beat up GM

  • Report this Comment On July 16, 2014, at 6:53 AM, mds wrote:

    Why report on F's debt when they have no issue managing it. It is lower than many companies you will tout as good investments and they never asked for a dime.

    They are killing GM and storming China. Also keep in mind how many cars/brands F has as compared to GM.

    F is on a tear and we all know it. It is on top as far as American car brands go.

  • Report this Comment On July 16, 2014, at 7:13 AM, mds wrote:

    Oh...Only reason GM is lower is because they picked our pockets to pay their bills. As far as Toyota and Honda are concerned; they don't have the Auto Worker Union to worry about.

    WAKE UP PLEASE !

    Easy to criticize when you don't back it up with substance.

  • Report this Comment On July 16, 2014, at 8:16 AM, TMFTwoCoins wrote:

    @mds

    Did you actually read the article, or did you read only the first two sentences and skip down to comment? If you read the entire article you might have noticed me point out Ford's automotive debt, rather than its total debt, is actually a fraction of GM's. Also, I note that the rest of Ford's total debt is under its finance division, where Ford uses it to generate billions of net income. Ford's large debt pile is actually a competitive advantage in this case.

    Now, with that out of the way, allow me to correct you on a few other points.

    While I agree Ford is on a tear, it actually sells about 60% of the global vehicles GM does and has half the number of brands -- those factors play very little into the debt picture, anyway.

    I think you should go re-read the article, it's very pro Ford.

    Thanks for reading, or starting to read, at least.

    Daniel

  • Report this Comment On July 16, 2014, at 9:59 AM, falu17 wrote:

    Interesting analysis, but I believe one key point is missing here: as long as the customers of Ford Credit pay off their debt, this is indeed a very profitable situation for Ford. However, as soon as Ford is unable to collect on the 'asset side' (the loans it made to its consumers), it may need to use other means to repay its massive debt load. This may not be a very big concern now, but it will be when the economy takes a turn for the worse (it'll happen at some point, hopefully many years from now). Of course these loans are (I assume) collateralized by the cars, however impounding and selling those (in whatever state they may be at that time...) may be troublesome and not lead to a full recovery as well. I also wonder how strict the credit requirements are for Ford Credit, as there may be significant pressure from the Automotive side to get additional sales which can lead to providing financing to consumers with poor credit.

    So in short, I think it's great that Ford Credit is making so much money now, but it could become a big burden in the future! I for one remain skeptical about this growth...

    Disclosure: I am long in Ford

  • Report this Comment On July 16, 2014, at 10:35 AM, TMFTwoCoins wrote:

    @falu17

    Great point, and yes definitely something to keep an eye on. If you dig into Ford's quarterly analysis of Ford Credit, it gives some great insight into these matters. Currently, Ford estimates that about 5-6% of its outstanding loans are with higher risk consumers -- which is slightly better than, or right at, industry average.

    Another angle to this is that if and when consumers default on loan terms, what Ford is able to generate from auction sales. Off the top of my head, as Ford tracks this closely, its auction values have risen substantially, so that helps hedge the automaker's loss.

    Overall, historically, Ford Credit has a very minimal loss from defaults etc.

    In fact, I looked this up just now in my data. Ford Credit generated more net income in 2009 than the rest of Ford. Further, Ford Credit's income before taxes was higher in 2009 than it was in 2013 or 2012. Unfortunately, I'd have to crack open the annual filings to see further back than 2009. From those figures, though, it seems to suggest Ford Credit is actually less volatile in terms of net income during recessions -- though, I'd like to see 2008 and 2007 figures before saying that with 100% certainty.

    Good points, thanks for commenting. I might dive deeper on this subject.

    Daniel

  • Report this Comment On July 16, 2014, at 12:38 PM, lbcentaur wrote:

    Didn't the Fool post an almost identical article a few weeks ago? I guess it's worth repeating because some people forgot.

  • Report this Comment On July 25, 2014, at 10:40 PM, LolaFord wrote:

    Don't discount the risk that comes with the debt used by Ford Credit. A big chunk of that is in leases and even though most of it is high quality credit it is inherently very risky because of the inflated residual values FMCC uses to help sell vehicles with low payments. FMCC has taken huge losses on this in the past and the outlook is not good for the used car market during the next two years.

    Also the 5-6% FMCC says are higher risk loans is actually higher. They advertise to dealers that they buy the lowest FICO scores of any other captive. Their internal grading system rates low FICO scores with larger downs or shorter down payments as low risk. They don't have to report out like banks because they are not FDIC insured. They also can and do give unlimited extensions on past due customers to help keep delinquency rates artificially low.

    They make the bulk of their income from providing floorplanning for dealer inventory. They are wiling to take less rates than banks and provide insurance coverage as part of their package deals. It is very profitable - however large scale catastrophes could wipe out their profits. They took a big hit last quarter because of regional bad weather.

    They are profitable for sure but there is much risk in this heavy debt that should not be discounted when making investment decisions.

  • Report this Comment On November 08, 2014, at 11:53 PM, jcmoore2012 wrote:

    I really don't give ford kudo's for not taking a bailout...what they did was finance their debt with loans and other financial instruments...they still had quite a bit of debt and losses, they just masked it with creative financing. What's going to happen if the fed stops printing money, and ford isn't able to carry 150billion in debt for auto loans...they will have to use their own money to finance cars, of which they don't have enough to cover their level of sales.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3030131, ~/Articles/ArticleHandler.aspx, 11/27/2014 5:24:25 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement