Sustainable Growth Rate: A Case Study of Ford Motor Company

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<p align=”center” style=”text-align:center;line-height:200%”><b>Introduction </b></p>
<p style=”text-indent:.5in;line-height:200%”>Ford Motor Company is a publically traded firm with its headquarters in Dearborn, Michigan. Ford&rsquo;s business revolves around the production and sale of automobile brands like Ford, Volvo, Mercury and Jaguar.&nbsp; A part from production and sale, Ford is also engaged in other ventures through its Hertz Corporation branch which engages in car rental services (Ihlen and Roper, 2014). With its vision of operation being &ldquo;To become the world&#39;s leading consumer company for automotive products and services&rdquo; (Hopf, 2016), Ford distributes its products in a number of countries all over the world through its outlets located in strategic cities and towns. Ford Motors operates its business processes under the mission; &ldquo;We are a global family with a proud heritage passionately committed to providing personal mobility for people around the world. We anticipate consumer need and deliver outstanding products and services that improve people&rsquo;s lives&rdquo; (Hopf, 2016). Ford has been operational for over five decades. Despite the challenges faced by this company, its brands have stood put in the market based on critical issues such as fuel consumption, imperial prices, and attributes of class and high levels of customer loyalty. This paper seeks to undertake a critical analysis of Ford Motor Company&rsquo;s sustainable growth rates (SGR) between 2014 and 2016 fiscal years.</p>
<p align=”center” style=”text-align:center;line-height:200%”><b>Sustainable Growth Rate</b></p>
<p style=”line-height:200%”>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; According to Kolk and Tsang (2015), the sustainable growth rate of any firm is indicated by its profit margins, net asset turnover, it financial policies and its dividend policies. Firms recording higher profit margins tend to have an increased advantage in their efforts of raising finances through internal measures. This goes a long way in increasing their levels of sustainable growth. Similarly, Hopf (2016) explains that firms which experience periodic increments in their net asset turnover go a long way in increase in the levels of sales generated from their business ventures. As a result, the firm&rsquo;s need for assets diminishes, leading to an increase in its sustainable growth rate. On the other hand, as the debt/ equity ratio of a firm increases, its levels of financial leverage also increase. In the long run, an additional debt financing is made available, leading to an increment in the extents of the organization&rsquo;s SGR. Increments in the post-tax net profit percentage increases the levels of a firm&rsquo;s SGR.</p>
<p style=”line-height:200%”>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Higgen&rsquo;s Model is one of the most useful tools of calculating the sustainable growth rate of a firm.&nbsp; In this model, sustainable growth rate is calculated by the formula below</p>
<p style=”line-height:200%”>SGR= (P) (1-R) (1+L)/ A- (P) (1-R) (1+L) (Shaheen and Cohen, 2013)</p>
<p style=”line-height:200%”>In this case,</p>
<p style=”line-height:200%”>P= Profit Margin on Sales after Profit</p>
<p style=”line-height:200%”>R= Percentage of Profit Returned to Owners</p>
<p style=”line-height:200%”>L= Debt to Equity Ratio</p>
<p style=”line-height:200%”>A= Assets to Sales Ratio</p>
<p style=”text-indent:.5in;line-height:200%”>Ford Motor Company&rsquo;s debt to equity ratios have been on the increase over the last three years ranging from 0.14, 0.25, and 0.34 in 2014, 2015 and 2016 financial years respectively. Further, the organization&rsquo;s assets to sales ratio has seen a minimum increase within the same period ranging from 0.14, 0.142 and 0.18 respectively. The percentage profits returned to owners ranged from 12% to 12.6% to 14.2% respectively. The profits margins on sales were recorded as; $1.2 billion, $0.15 billion and $2.6 billion in 2014, 2015 and 2016 respectively.</p>
<p style=”line-height:200%”>Therefore, the SGR for Ford Motor Company is recorded as:</p>
<p style=”line-height:200%”>SGR2014 = 1.12</p>
<p style=”line-height:200%”>SGR 2015= 1.305</p>
<p style=”line-height:200%”>SGR 2016= 1.503</p>
<p align=”center” style=”text-align:center;line-height:200%”><b>Consequences faced by Companies Growing at a Rate not consistent with their Sustainability Rates</b></p>
<p style=”text-indent:.5in;line-height:200%”>Sustainable growth rate is one of the most important goals of explaining the extents to which a company achieves its financial goals. There are a number of consequences associated with inconsistent growth rates among companies.&nbsp; For instance, if a company reports a positive sustainability rate in a falsely way, it increases the levels of expectation among its investors. Failure to achieve such goals for a long time diminishes the levels of trust from the stakeholders of the company (Ihlen and Roper, 2014). On the other hand, reporting sustainable growth rates which are below the real figures of the organization may shun investors away.&nbsp; In any case, people invest their finances in promising ventures. Similarly, inconsistent growth rate records gives poor reports to the management based on areas such as infrastructural improvements, the need for higher capital investments and critical areas in the business that require rectifications. In this case, the management relaxes while the other operations are flawed.</p>
<p align=”center” style=”text-align:center;line-height:200%”><b>Rewarding Stockholders for Underperformance</b></p>
<p style=”line-height:200%”>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In instances where a company records a higher value compared to its estimates, Kolk and Tsang (2015) propose that such organizations need to make acquisitions as a way of maximizing their value. Ford Motor Company could increase it competitive advantage through mergers and acquisitions of profitable companies in its fields of operation as a way of increasing value to its stockholders. On the other hand, General Motor could take the option of returning cash to its shareholders in the form of dividends. This is particularly when the company has exceeded its growth rate goals and there are no promising opportunities for investment in other companies. On the other hand, the company could shift a percentage of the risks involved to senior executives of the company if it performs below the required rate. This cushions the stockholders from incurring the cost of this burden.</p>

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