Ford’s Jim Hackett had a bold vision—but couldn’t improve this all-important financial metric

Hackett failed to deliver what's essential to reviving an old-fashioned metal-bending enterprise: Consistently rising returns on investment.

Our mission to help you navigate the new normal is fueled by subscribers. To enjoy unlimited access to our journalism, subscribe today.

Jim Hackett tried to transform an old-line industrial icon by forging a daring template to go driverless and electric. As it turned out, what doomed Hackett was his failure to perform what a bloated automaker needs most, a basic restructuring to squeeze far more dollars in profit from a shrunken, highly-efficient base of plants and design centers.

On August 4, the Ford Motor Co. announced that CEO Hackett will step down after a rocky tenure of just over three years. Unlike Hackett, who ran furniture-manufacturer Steelcase before joining the automaker, Ford is naming one of its own, COO and 13-year veteran Jim Farley, who rose in sales and marketing.

In May of 2017, the Ford board promoted Hackett to CEO with a charge to “modernize” the 114 year old carmaker. In pursuit of that mission, Hackett strove to curb manufacturing costs by deploying robots, and use common parts across the portfolio. His blueprint for streamlining outmoded design and development processes centered on introducing such techniques as 3D printing and virtual reality. Overall, Hackett followed a multi-front campaign. He aimed to fix, not ditch, failing overseas operations, notably in Europe. A second quest was advancing three promising new fields, electric vehicles, mobility including dynamic vans, and self-driving cars. Hackett also pledged to strengthen the profitable lines that are paying for the foreign losses and fresh investments (think trucks including Ford Ranger, and SUV series––plus all the Big “E’s,” Explorer, Escape, Expedition, Edge and EcoSport).

Hackett made a number of smart moves, among them shedding almost all of its money-losing passenger car line from the budget Fiesta to the luxury Lincoln sedan, not to mention the fading Taurus, once America’s best selling brand. The all-electric Mustang Mach-E, due for launch in late 2020, is a potential hit that could prove a strong challenger to Tesla Model Y.

But overall, Hackett’s bold vision failed to deliver what’s essential to reviving an old-fashioned metal-bending enterprise: Consistently rising returns on investment from fresh and staple products. The way to get there? Through a combination of hammering down production costs, and lowering the up-front outlays for designing pioneering products and retooling plants.

A key metric shows that Ford’s numbers got worse under Hackett’s leadership. The yardstick is Cash Operating Return on Assets, or COROA, developed by leading accounting expert Jack Ciesielski. COROA measures the cash generated from all the factories, inventories and other assets invested in the business. Those total assets are the denominator. For the numerator, COROA uses cash from operations, but eliminates the effects of leverage and taxes by adding back cash payments for both to get “Operating Cash Flows.” What you see from COROA is a pure measure of management’s stewardship of all the dollars entrusted to them by shareholders.

For 2016, the year before Hackett took charge, Ford had an average of $266 billion in total assets on its balance sheet (including accumulated depreciation). It recorded $19.85 billion in cash from operations from those investments for a return of 9.2%. By Big Manfacturing standards, that number seemed middling. It trailed auto parts-maker Borg Warner by a wide margin, but almost matched conglomerate Danaher (9.2%) and edged out GM (8.6%).

But over the three years spanning 2017 to 2019, while Ford swelled its balance sheet, it produced less cash from all the extra investment. Over that period, its total average assets rose from $266 to $290 billion, or 9%, while its operating cash flow fell by $2.2 billion, to $17.64 billion. In other words, it posted a negative return of 8.5% on the $26 billion in added assets. As a result, its COROA dropped from 9.2% in 2016, to 8.2% in 2019.

Ford still managed to beat GM, whose performance deteriorated even more. But it stands well behind Danaher (9.8%) and Borg Warner (11.3%). Interestingly, Tesla was a laggard in 2016 at a negative COROA of .4%. But since then Tesla roared ahead: by 2019, Tesla’s COROA had jumped almost 9 points, pulling a bumper ahead of Ford at 8.2%.

That Ford has long been generating inadequate returns on capital, and that those returns are falling, is reflected in its stock price. At the close of 2019, its shares stood at $9.30, their level in 1987. In the pandemic crisis, Ford’s shares have sunk bo $6.84, dropping its market cap by one-fourth to just $27.2 billion.

Even at these levels, though, Ford is not a buy. The reason is fundamental: It’s stuck in a ferociously competitive, low-margin business. It also faces governments and unions that pressure automakers to keep outdated factories running to preserve jobs, and impose three levels of regulations governing emissions, safety and fuel efficiency. Plus, competitors are constantly launching hot new models, and matching or beating them requires multibillion investments that take years to pay off.

Ford’s best option for getting profitable is getting smaller. It can get there if it focuses in two areas, its highly lucrative SUV and truck brands, and electric cars that promise big growth in the years ahead. That course would force Ford to forget about building a glorious future to match its storied past—and instead settle for building a steady, reliable vehicle that can stay on the road.

More must-read finance coverage from Fortune:

• VC icon Alan Patricof and SoulCycle vet Abby Levy launch fund to invest in aging
• When will the pandemic end? Not before 2022, ex-U.S. surgeon general warns
• Women are more worried about layoffs than their male coworkers
• PPP part 3? Everything you need to know about the proposed expansion of the small business loan program
• Bank of America CEO Brian Moynihan on how business can measure stakeholder capitalism