Ford Motor Company (NYSE:F) has been paying down and reducing its long term debt exposure over the past five years, whilst keep its cash balance relatively stable, allowing the company to slowly improve its net debt position.
A more in-depth view of GM’s balance sheet shows the company’s strong net cash balance. However, towards the end of the chart in 2011, the company has been slowly increasing its long term debt exposure.
Cash and equivalents have remained in a tight range after they grew rapidly in 2008, which offset the majority of the company’s debt and threw GM into a net cash position.
Compared to the relatively stable balance sheets of both Ford and GM, Volkswagen’s balance sheet debt is rapidly rising. Cash and equivalents have remained stagnant like at Ford; however, unlike Ford, Volkswagen’s net debt position is deteriorating rapidly, putting strain on the company’s balance sheet.
As I have mentioned, Volkswagen is bigger than Ford, so it is able to sustain a higher level of net debt; but when company net debt is compared to EBITDA ,both Ford and Volkswagen appear to be on a level playing field.
On a net debt to EBITDA basis, Volkswagen and Ford are on the same level, despite Volkswagen’s bigger market cap. Ford’s earnings are growing, while Volkswagen’s are shrinking, which is forcing the net debt to EBITDA ratio to fall.
The higher debt ratios in 07-09 are attributable to lower earnings throughout the credit crunch. Ford’s earnings have grown strongly over the past several years, and coupled with the company’s debt reduction this improved the company’s debt profile and sustainability.
On the other hand, Volkswagen’s earnings have grown slowly, almost in-line with the company’s increasing debt, which has given the company a stagnating net debt to EBITDA ratio.
So, how sustainable are debt costs?