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.
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?
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:
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.