Over the last several months, Ford Motor Company ( NYSE: F ) rose to a multi-year high, fueled by the newfound success with the electric truck (EV) . Yet, growth forecasts remain modest and the debt-to-equity ratio high.
When we think about how risky a company is, we always like to look at its use of debt since debt overload can ruin it. Notably, Ford does carry a lot of debt. But should shareholders be worried about its use of debt?
After the 2020 market crash, the stock rallied big, basically quadrupling and reaching $16 for the new 5-year high. Thanks to the new F-150 Lightning Truck, sold-out Mustang Mach-E, and other upcoming EVs, Ford generated significant positive buzz. Electrified vehicle sales doubled in the first half of the year, reaching 56,570 units.
The company also announced a plan for an all-electric line-up by 2030 . It is an ambitious plan from one of the oldest car brands that remain the most present automobile on the American market. High brand loyalty is a strength in the transitory periods.
What Is Ford Motor's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Ford Motor had US$152.7b of debt in March 2021, down from US$167.3b, one year before. On the flip side, it has US$31.3b in cash leading to net debt of about US$121.4b.
NYSE: F Debt to Equity History July 7th, 2021
A Look At Ford Motor's Liabilities
We can see from the most recent balance sheet that Ford Motor had liabilities of US$94.2b falling due within a year and liabilities of US$132.6b due beyond that. Offsetting this, it had US$31.3b in cash and US$3.97b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$191.6b.
This massive deficit casts a shadow over the US$57.9b company. So we think shareholders need to watch this one closely. Ford Motor would probably need a significant re-capitalization if its creditors were to demand repayment.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Weak interest cover of 0.96 times and a disturbingly high net debt to EBITDA ratio of 14.4 hit our confidence in Ford Motor like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. However, it should be comfortable for shareholders to recall that Ford Motor grew its EBIT by a hefty 492% over the last 12 months. If it can keep walking that path, it will be in a position to shed its debt with relative ease. The balance sheet is the area to focus on when you are analyzing debt. But it is future earnings that will determine Ford Motor's ability to maintain a healthy balance sheet going forward. So if you're focused on the future, you can check out this free report showing analyst profit forecasts .
But our final consideration is also crucial because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Happily for many shareholders, Ford Motor produced more free cash flow than EBIT over the last three years.
Ford Motor's interest cover left us tentative about the stock, and its level of total liabilities amplified that impression.
But on the bright side, its conversion of EBIT to free cash flow is a good sign and makes us more optimistic. Looking at the balance sheet and considering all these factors, we believe that debt makes Ford Motor stock a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage.
Even so, car manufacturing is hardly the best business model. It is a highly capital-intensive cyclical business, required to continuously innovate to stay on the top of the game. Ford has unquestionably surprised by a successful EV launch. If the trend persists, we will see a balance sheet turn-around from one of the most resilient car brands in history.
Although the balance sheet is the area to focus on when analyzing debt, every company can contain risks outside the balance sheet. Case in point: We've spotted 2 warning signs for Ford Motor you should be aware of, and 1 of them is concerning.
It’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.