Solvency Ratios

Short-term solvency ratios reflect the ability of the company’s liquid assets to meet its short-term obligations. In other words, such ratios determine if a firm can avoid financial pressure in the short-run. Considering Ford’s performance from this point of view, one may say about Ford’s low level of net working capital to total assets, which ranged from 0.17 to 0.45. This reveals Ford’s low level of liquidity and its inability to repay debts in case of short-term obligations. Even worse tendency was observed in Toyota with the level of net working capital to total assets ranging from 0.0005 to 0.8.

Regarding financial leverage ratios, Ford’s constantly growing total debt ratio has to be mentioned. This demonstrates company’s weak equity position and need for an additional leverage. The times interest earned ratio in both companies is low, what demonstrates their low ability to meet debt obligations and ensure interest payments to debt holders. Ford’s extremely low average cash coverage ratio of 0.0001 throughout the latest 5 years reflects its inability to acquire cash from the operations and has to be improved.

The Return on Assets (ROA), being one of the profitability ratios, declined to less than 1% and 1.3% in Toyota and Ford respectively. However, the Return on Equity (ROE) ratio that remained in Toyota comparatively constant, changed in Ford dramatically year after year. In 2009 there was a decline down to -35%, meaning shareholders’ unwillingness to invest additional amounts of money in the company.

A typical large company in the United States has an average Price-earning ratio between 16 and 20. Over the last 5 year analysis Ford has 2.5 P/E ratio, what is an extremely low index for the industry it operates in. It also maintained average Price/Earnings to Growth ratio of -14.24, revealing the tendency of Ford’s stocks undervaluation.

Toyota demonstrated a constant internal growth rate in the period from March 2006 to March...