I have been looking at buying stocks, i’ve been paying especially close attention to the Ford stock. Looking over the key statistics i find:
Enterprise value: $129b
Total Debt: 133b
Net Income: -5b
Total Cash: $29b
I assume the total cash is already incuded in the value of the enterprise. So realistically the company is worth $-4 billion. And losing another $5 billion every year!
What am i missing? Why is this company still in operation?
Note: I am not asking for investment advice, just curious.
I know of one company that shut down with plenty of cash on hand. It was a construction company, and while quite solvent, was not able to find enough contracts to keep going…so they paid all thier creditors, sold all the assets (lots of heavy equipment) payed a big bonus to all the employees, and said thanks, and good luck at your next job.
Given that Ford hasn’t declared bankruptcy, we can assume that they’re managing to pay their debts as they come due. The total book liabilities exceed the total book assets, but they have enough cash to meet the liabilities due this week, this month, this year.
So they stay in operation and hope for a turnaround, because the alternative of liquidating the company is even less attractive.
Total cash is a big part of the answer. If they have $29B in cash, they can go for 6 years with losses of $5B per year.
Total debt and total assets are not all that important to company survival because:
debts are not due immediately - all you have to cover are the payments. Some of Ford’s debts are 30-year bonds that are due way in the future.
assets on the balance sheet are often not at fair market value. If Ford bought a factory at $300 million 20 years ago, it might be appraised at $900 million today, but might be recorded on their balance sheet at only $150 million after subtracting depreciation. For that factory example, company assets would be $750 million below their fair market value.
Or, let’s put it in terms of the average consumer. You made $50k in wages last year, but you spent $55k. You made that happen by charging some things to your credit cards so your total balance increased. Imagine also that you owe $200k on your house and it is worth $180k. You’re still making the same mortgage payments you were when the house was worth more, and you’re only paying $100 more per month in credit card payments. Your credit score isn’t quite as good and you don’t want to sell the house anytime soon, but it doesn’t change your ability to get by from day to day very much.
Oftentimes a failing corporation will ride it out as long as they can. The employees will continue to get paid and the principles will start to suck out as much money as they can. They will do anything they can to delay paying their suppliers. They buy time. When the problem gets big enough and becomes apparent, the creditors will form a bankruptcy committee go to court and force the company into bankruptcy. Under those circumstance, past transactions can be reversed. For instance, if bonuses were paid within say, the last six months, the creditors can do a claw back.
It gets complex and very legal but, in the capitalistic system, bankruptcy can be very profitable for some individuals. The problem is that the creditors oftentimes don’t act fast enough. On the other hand, it does them no good to force an otherwise good company into bankruptcy if it makes sense to see them through a rough period. It’s all part of doing business.
Enterprise Value is a metric meant to give you a quick and dirty dollar figure of how much it would cost to buy out the company.
It’s not the same as the book value of the company that you would find in its financial statements, so your conclusion that Ford is worth -$4 billion is incorrect. A low stock price could be the culprit.
I agree with much of your post with the exception of this statement. Having cash does not, on its own, equate to having liquidity. You really have to look at the overall working capital position of a company. A company can go down pretty quickly by letting payables get out of hand.
Most companies operate in a constant state of deficit. This is alright because the company is constantly growing. If it ever stopped expansion, it would be able to pay off its debt once and for all (theoretically.)
Say that I borrow one dollar, saying that I’ll be able to pay you two dollars tomorrow. I’m now one dollar in debt. The next day I have two dollars, which I show to you as proof that I’m good on my word. Instead of giving it to you, though, I ask to borrow two more dollars, saying that I’ll have four dollars to pay you tomorrow. Now I’m three dollars in debt. The next day I come back with four dollars, which I show you, and I ask if I can borrow four dollars in exchange for eight dollars tomorrow. Now I’m seven dollars in debt.
Each time I borrow money, I use that money to expand my business, so I have a larger income. That expansion lets me pay off an ever increasing debt. But rather than paying off the debt, I just borrow more so I can expand more. And the bank is happy to do this because they are making ever increasing interest, and because they trust that I’ll keep being able to expand my business to cover my debt.
But at the end of every day, I’m actually in the hole.
This might be true for companies in the early stages of expansion but generally not true for most companies. You’re leaving out the fact that many companies grow through internally generated cash flow.
A single snapshot financial statement does not necessarily prove a company’s viability – thought it may make some strong suggestions about it. To draw a parallel to the most micro- of microeconomic entities, contemplate a family. They have a house valued at $250,000 on which they owe $190,000, giving them an equity of $60,000 – but in this market its value if they wished to sell might draw them no more than ~$200,000m cuttin their equity to $10,000. They have a car valued at $13,000 and owe $9,500 on it. A credit card with a $2,800 balance. $2,500 in the bank, and a 401(k) with $5,000 in it – but of course that’s not accessible without penalty. And it’s Wednesday when this snapshot is taken, and the breadwinner’s payday is a week from Friday. So there is no income, just expenditures.
Translate this to a company. Any given random point may show them in what looks like dire straits – but not take into account major anticipated income. It’s August, just before the start of the new model year for Ford. Lots of money tied up in production, sales at the moment low. But anticipated sales volume could turn that picture around on the proverbial dime.
I’m not suggesting my analysis is right here – just that it’s very easy to mislead with strong statistical cites selected to prove a point.
A corporation can also become, or be perceived either in the short- or long-term as, “too big to fail.” Either its creditors will be desperate to keep it going so that they can get some of their money back, or its many employees will be willing take big cuts in pay or benefits to keep their jobs, or the government will decide that it is too vitally important to the national economy to be allowed to fold. Each of these factors is, in varying degrees, arguably applicable in Ford’s case.
