Leverage in auto industry
The auto industry is highly capital intensive in nature and auto companies including Ford Motor Company (F) tend to utilize debt extensively. High debt levels increase the risk profile of a company because debt is a contractual obligation that a company must fulfill regardless of market conditions. Therefore, it’s important for investors to pay attention to an auto company’s leverage position.
In this article, we’ll take a closer look at Ford’s leverage position at the end of the second quarter.
Negative net debt to EBITDA
It’s not always bad for a company to have high leverage. What matters most is a company’s ability to pay back its debt and related interest with ease. A company’s ability to repay its debt can be determined by looking at its net-debt-to-EBITDA ratio.
At the end of 2Q16, Ford had a net-debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of -0.83x. This ratio was negative due to the company’s negative debt. Other automakers (IYK) that currently have negative net debt are General Motors (GM) and Volkswagen (VLKAY).
Among all major automakers, Fiat Chrysler Automobiles (FCAU) has the highest leverage. Although higher leverage can magnify earnings, it can also squeeze margins as interest rates rise.
Fiat Chrysler will release it 3Q16 earnings a day before Ford’s earnings release. Investors can learn about analysts’ estimates for its earnings in Fiat Chrysler Plagued by Issues in 3Q16: Approach with Caution?
Ford’s healthy interest coverage ratio
At the end of the second quarter, Ford had an interest coverage ratio of 10.5x. The interest coverage ratio can be defined as a company’s EBIT (earnings before interest and taxes) to interest expenses. In the case of Ford, this high interest coverage ratio shows that the company’s operations are sound enough to cover its interest expenses.
Read on to the next part where we’ll explore possible highlights of Ford’s 3Q16 earnings.