Change is the only constant in the world. With the inevitable change comes either adaptation or obsolescence. While undergoing one of the most significant transitions in the industry's history, automotive companies like General Motors(NYSE: GM) are opting for adaptation.
Yet, the analysts are rightfully skeptical about the optimistic goals announced by the company—especially given its returns that we will examine in this article.
High Revenue Ambitions
After a fiasco with the defective battery modules installed on Chevrolet Bolts that resulted in a recall of 142,000 vehicles – LG Electronics has agreed to reimburse General Motors for US$1.9b. The faulty modules have caused at least 13 vehicle fires. GM has been in a partnership with LG since 2019 through a joint venture Ultium Cells LLC, investing US$2.3b in a battery plant in Ohio and an additional US$2.3b in a battery plant in Tennessee earlier this year.
Meanwhile, the company plans to double the annual revenue by the end of the decade, bringing it up to US$280b. Cruise ride-hailing service should be a large part of the plan, with projected revenue of US$50b from a fleet of 1 million vehicles.
This is hindered by the short-term obstacles that include the above-mentioned battery problems and the global semiconductor shortage. In addition, it is necessary to mention that the pension fund is underfunded by US$12.4b, not alarming given the size of the company but still a considerable sum.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for General Motors, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = US$15b ÷ (US$242b - US$75b) (Based on the trailing twelve months to June 2021).
Thus, General Motors has a ROCE of 9.0%.
In absolute terms, that's a low return, but it's around the Auto industry average of 9.8%.
In the above chart, we have measured General Motors' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting from now on, you should check out our free report for General Motors.
What The Trend Of ROCE Can Tell Us
There are better returns on capital out there than what we're seeing at General Motors. Over the past five years, ROCE has remained relatively flat at around 9.0%, and the business has deployed 24% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line
As we've seen above, General Motors' returns on capital haven't increased, but it is reinvesting in the business.
However, those goals divide the analysts. On one side, Wedbush Securities (Outperform) claim that GM's financial targets are achievable. At the same time, the Bank of America (Buy) remains optimistic about their new projects like OnStar, BrightDrop, and GM Defense.
Others, like Worm Capital, are on completely another end of the spectrum, claiming that GM is "the prime example of a mature business model that could face obsolescence."
Yet to long-term shareholders, the stock has gifted them an incredible 117% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continues, we think the likelihood of it being a multi-bagger from here isn't high.
If you'd like to know about the risks facing General Motors, we've discovered 1 warning sign that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.