Can Ford Motor Company (F) Sustain Its Debt?

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For the past year or so, I have been contemplating buying Ford Motor Company (NYSE:F). I believe the company is really quite undervalued against the rest of its sector and the wider market. However, there is one thing that worries me: the company’s debt.

Debt level

$US Millions 2007 2008 2009 2010 2011
Net debt $117,732 $114,244 $88,967 $68,418 $63,722
Long-term debt $107,478 $90,224 $89,073 $62,324 $59,177
Cash & cash equivalents $50,798 $39,952 $43,474 $35,570 $35,766
Total Debt $168,530 $154,196 $132,441 $103,988 $99,488

This table only goes to 2011, but the 2012 picture looks the same as 2011.  During 2012, Ford saw a 10% rise in its long term debt during 2012, up to $66 billion, and total debt grew 5% to $105 billion, while cash and equivalents remained static. Net debt is around $70 billion.  As Ford Motor Company (NYSE:F) has a market capitalization of $47 billion and net debt of $70 billion, the company has a gearing level of roughly 140%.

Is this too much?

Looking at the table above, Ford Motor Company (NYSE:F) appears to be working hard to bring down is level of debt. Indeed, total debt was $160 billion in 2007 and has now fallen to nearly $105 billion (that is a fall of 35%), which is not a massive reduction. However, when the level of gearing is taken into account the difference becomes startling.

In 2008, Ford Motor Company (NYSE:F) was trading at a gearing level 10 times. Now, Ford it is trading on a gearing level of 1.4 times. In addition, as shown below, the company’s level of debt to EBITDA has also fallen dramatically.

So Ford Motor Company (NYSE:F) is working hard on reducing its debt burden, but how does it compare to other companies in its sector?

Comparison

This chart compares the differences in net debt between the major US auto makers, Ford, GM  , as well as Volkswagen (NASDAQOTH:VLKAY), which I believe is the best auto maker outside of the US.

This highlights the dramatic fall in Ford’s net debt over the past five years. On the other hand, the chart highlights the rise in Volkswagen’s net debt. According to this data, GM has had a net cash position since mid-2008.

Volkswagen’s debt is growing, surpassing Ford’s in dollar terms back in 2011. However, Volkswagen is the larger company, (about twice the size of Ford, with a market cap of approximately $100 billion to Ford’s $47 billion) so, in theory, it can handle the larger amount of debt. Although as I show below, Volkswagen’s debt is costing the company more and more of its EBIT in interest.

Presented in chart form, the reduction in debt becomes obvious.

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