General Motors Company (NYSE:GM): Time For A Financial Health Check

By
Simply Wall St
Published
May 22, 2018
NYSE:GM

General Motors Company (NYSE:GM), a large-cap worth US$53.69B, comes to mind for investors seeking a strong and reliable stock investment. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. However, the key to extending previous success is in the health of the company’s financials. I will provide an overview of General Motors’s financial liquidity and leverage to give you an idea of General Motors’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into GM here. Check out our latest analysis for General Motors

How much cash does GM generate through its operations?

Over the past year, GM has ramped up its debt from US$75.12B to US$94.22B , which comprises of short- and long-term debt. With this rise in debt, GM currently has US$19.53B remaining in cash and short-term investments for investing into the business. Additionally, GM has produced cash from operations of US$17.33B over the same time period, leading to an operating cash to total debt ratio of 18.39%, indicating that GM’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In GM’s case, it is able to generate 0.18x cash from its debt capital.

Can GM meet its short-term obligations with the cash in hand?

At the current liabilities level of US$76.89B liabilities, it seems that the business has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.89x, which is below the prudent industry ratio of 3x.

NYSE:GM Historical Debt May 22nd 18
NYSE:GM Historical Debt May 22nd 18

Can GM service its debt comfortably?

Since equity is smaller than total debt levels, General Motors is considered to have high leverage. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. Though, since GM is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

With a high level of debt on its balance sheet, GM could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for GM to increase its operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. I admit this is a fairly basic analysis for GM's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research General Motors to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for GM’s future growth? Take a look at our free research report of analyst consensus for GM’s outlook.
  2. Valuation: What is GM worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether GM is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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Simply Wall St has no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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