There’s a lot of people out there that understand Ford Motor Company (NYSE:F)‘s debt issues accurately. However, there still remain some misconceptions about the present debt levels, and ignorance about future issues. Much of the debt that shows up on the financial statements is actually great for Ford. Yet, there are also issues that don’t show up that need to be aired out. I’ll show you everything you need to know to be a more knowledgeable investor, and we’ll do it in three simple steps: the past, present, and future of Ford’s debt.
It started two years before the great recession, when Alan Mulally was named CEO of Ford. One of the first things he accomplished was receiving a large loan to assist the troubled automaker with capital needed to turn the company around. Mulally described it as “a cushion to protect for a recession or other unexpected event.” It wasn’t easy to secure the $23.4 billion dollar loan, as Ford had to put up its heritage, its prized Blue Oval logo as collateral. If you’re keeping score, that makes it: Mulally/Ford 1; rest of Detroit 0. Having this cushion gave Ford the maneuverability to avoid the government bailout. That said, $23 billion is no small amount of debt to have on the financials.
Last year Ford wiped the last of the pre-recession loan and was rewarded by receiving investment grade once again. This is where some of the misconceptions begin. People hear the large 2006 loan is paid off, yet still see around $90 billion in total debt. Let’s take a quick look at the ratios of how that compares, and explain why it doesn’t matter, and that Ford’s high debt level is actually good for investors.
- Debt to equity ratio tells us what portion of the debt, as opposed to equity, a company uses to help fund its assets.
- Current ratio tells us what proportion of a company’s short-term assets is available to finance its short-term liabilities.
|Company||Debt to Equity||Current Ratio|
|General Motors Company (NYSE:GM)||0.33||1.25|
|Toyota Motor Corporation (NYSE:TM)||0.55||1.06|
|Honda Motor Co Ltd (NYSE:HMC)||0.49||1.29|
You can see why the misconceptions start, as the numbers for Ford are clearly higher in both ratios. Some investors simply don’t have the time to dig deeper and ask the right questions, which is why the Fool is here, to help you invest better. If you’re asking why there’s still almost four times the debt of the 2006 loan, it’s because the bulk of that $90 billion is under its finance division; approximately $71.9 billion as of 2011.