Even though it is no longer the largest automaker in
the world, General Motors (GM) still ranks among the world’s largest and most
well know car manufacturers. It is second only to Toyota. The company delivered
10 million vehicles globally in 2016 and employs 181,000 people worldwide (“About
General Motors”, n.d.). The General Motors Company was founded in 1908 as a way
to condense several companies producing cars and trucks into one company. Those
companies included Buick, Oldsmobile, Cadillac, Oakland (Pontiac), Ewing, and
Reliance and Rapid trucks (“General Motors”, 2017). Today GM produces four core
brands of vehicles that make up a large part of their lineup: Chevrolet,
Cadillac, Buick, and GMC.
Although General Motors is
headquartered in Detroit, Michigan, the company has a large global footprint.
GM operates and sells vehicles in Europe, Asia, Australia, North America, South
America and Africa. In addition to their four core brands, GM has several
brands that are not sold in North America. These brands include Holden, Wuling,
Baojun and Jiefang. Aside from the United States, China is GM’s biggest market
with nearly 5,000,000 vehicles sold annually (“About General Motors”, n.d).
General Motors has been the topic of
many news stories over the last decade or so. The first being their filing for
chapter 11 bankruptcy. In June 2009, claiming to be $173 Billion in debt, GM
filed for chapter 11. Their financial situation forced them to downsize by
getting rid of the Pontiac and Saturn brands as well as selling the Saab
division. In November of 2010 GM made its return to the stock market with one
of the largest Initial public offerings in history (“General Motors”, 2017). Then
in 2014 GM was hit by the ignition switch scandal. For several years, employees
had been covering up that several vehicles had faulty ignition switches. It is
believed that these faulty switches caused over 120 deaths (“General Motors”,
2017). Despite this setback, General Motors has posted record sales numbers
from 2014- 2016 and continues to be at the forefront of the domestic and global
Current Ratio & Acid Test Ratio:
The current ratio is an indicator of a company’s ability to pay back
short-term debt. It can be found by dividing the current assets of a company by
its current liabilities (Keown, Martin & Petty, 2017). Referencing table 1,
General Motors current ratio can be calculated: Current Ratio = current
assets/current liabilities. $76,203,000,000/$85,181,000,000 = .89 for 2016.
$69,408,000,000/$71,217,000,000 = .97 for 2015.
The Current Ratio for General Motors
has dropped by .08 from 2015 to 2016. At the end of 2015 and 2016, the company
would not be able to pay off its short-term debts if they came due. This
increase is largely due to an increase in net receivables and short-term debt.
The increase in the net receivables is a result of the company extending credit
to its customers. This also shows that General Motors’ ability to collect from
its customers has decreased from 2015 to 2016 (“Financial Ratios,” n.d.). The
company also saw a slight rise in accounts payable during this year which
contributed to the rise in total current liabilities.
The Acid Test Ratio is another
measure that looks at a company’s ability to convert its current assets to cash
to cover its short-term liabilities. It is the ratio between a company’s cash
and account receivable and the company’s current liabilities (“What Is an
Acid-Test Ratio,” n.d.)
. The Acid
Test Ratio for General Motors can be calculated as follows: (cash + accounts
receivable) / current liabilities. (“What Is an Acid-Test Ratio,” n.d.)
/ $85,181,000,000 = .524 for 2016. ($15,238,000,000 + $26,388,000,000) /
$71,217,000,000 = .584 for 2015.
Both acid test ratios are considerably low and from 2015 to 2016 the
ratio falls by o6. A ratio of 1 would mean that the company’s assets that
easily made liquid are equal to the amount of short-term debt the company has. The
ratios show that General Motors has nearly double the amount of current debt as
it does liquidity to pay those debts (“What Is an Acid-Test Ratio,” n.d.). The
fall in the ratio from 2015 to 2016 can be largely attributed to the $5.4
billion rise in net receivables in 2016 as well as the $2.3 billion drop in
current cash and cash equivalents.
Days in Receivable & Accounts
Days in receivables is the average amount of time it takes a company to
collect payments that are owed to them after a sale has been made. It is
calculated by dividing the accounts receivable by the total daily credit sales
(Keown, Martin & Petty, 2017). For General Motors it is calculated as
follows: $31,703,000,000/($166,380,000,000/365) = 69.55 days for 2016.
$26,388,000,000/($152,356,000,000/365) = 63.21 days for 2015.
As show above, the average
collection period for General Motors increases by 6.34 days from 2015 to 2016. This
increase is due to the company’s $5.32 billion increase in accounts receivable.
Although their daily credit sales increased from 2015 to 2016, it was not
enough to offset the increase in accounts receivable. An increase in collection
periods is not a good thing for General Motors. It is always in a company’s
best interest to collect their cash as quickly as possible (“Days Sales
Outstanding”, n.d.). The time that a company spends waiting to receive this
money is money lost for them. If General Motors collected the cash quicker,
they could put the cash to work in the company quicker.
The accounts receivable turnover
ratio is directly tied to the days in receivable ratio. It is the number of
times that a company collects on its accounts receivable per year. This ratio
is used to determine how efficiently a company can issue credit and collect on
that credit (Keown, Martin & Petty, 2017). The ratio is calculated by
dividing the amount of credit sales by the accounts receivable. For General
Motors the calculations are as follows: $166,380,000,000/$31,703,000,000 =
5.25X for 2016. $152,356,000,000/$26.388,000,000 = 5.77 for 2015.
The ratio for the year 2016 is only
.52 lower than that of 2015. General Motors collected on their debts slightly
more in 2015 than in 2016. One might expect to see a higher turnover ratio from
a company that has accounts receivable that number in the billions of dollars.
A low turnover ratio could mean that the company does not have a very strict
credit policy or that they are struggling with their collections (“Accounts
Receivable,” n.d.). Not collecting their accounts receivable more quickly can
cause the company to not be able to invest an appropriate amount of money back
into the company in a timely fashion. The longer they wait to collect the more
opportunity they are missing out on to put that money to good use.
Days in Inventory & Inventory
Days in inventory simply shows how
long goods were held in inventory before they were sold to the customer. This
is a good number for investors to look at since it tells how long a company
takes to turn its inventory into profit. In this case, a lower number of days
in inventory is a good thing. It is calculated by dividing the yearly inventory
amount by the daily cost of goods sold for that year. General Motors’ days in
inventory are as follows: inventory/daily cost of goods sold. $13,788,000,000/($145,125,000,000/365)
= 34.68 days in 2016. $13,764,000,000/($134,054,000,000/365) = 37.48 days in
aspect, General Motors is improving. They have decreased the amount of days
items sit in inventory by 2.8 days from 2015 to 2016. This decrease in days in
inventory is driven by the sizeable increase in the daily cost of goods sold
while the amount of inventory only increased only slightly. This shows that the
company is improving its inventory management. Now that they are selling goods
quicker, they are allowing more cash to be used elsewhere instead of being tied
up in inventory (“Day Sales of Inventory,” n.d.).
inventory turnover ratio is very similar to the days in inventory measurement.
It is used to determine the amount of times inventories are sold and replaced
throughout the year (Keown,
Martin & Petty, 2017). This is an important measure for companies like
General Motors that move physical goods. It can be a good measure of a
company’s inventory management and their generation of sales (“Days Sales
Outstanding,” n.d.). It is calculated by dividing the cost of goods sold by the
inventory. For General Motors, it is calculated as follows: cost of goods
sold/inventory. $145,125,000,000/$13,788,000,000 = 10.53X for 2016.
$134,054,000,000/$13,764,000,000 = 9.74X for 2015.
Motors has increased the amount of times its inventory is turned over by .79X
from 2015 to 2016. This higher ratio in 2016 indicates a larger generation of
sales for the company. This higher ratio can also be a sign that the company
has issued more incentives to its customers (“Days Sales Outstanding,” n.d.). This can increase
sales causing the company to go through their inventory quicker. It can also be
due to the introduction of a new vehicle to their existing lineup. This drives
prices of older models down to make room for inventory of the new vehicle which
can increase the sales of those older models.
Operating Return on
Assets & Operating Profit Margin:
Operating return on assets shows the
company’s operating profits relative to the company’s total assets. The
operating return on assets is calculated by dividing the operating profits by
the total assets. It can also be calculated by multiplying the operating profit
margin by the total asset turnover ratio (Keown, Martin & Petty, 2017). General Motor’s
operating return on assets is as follows: operating profits/total assets.
$9,545,000,000/$221,690,000,000 = 4.31% for 2016.
$4,897,000,000/$194,338,000,000 = 2.52% for 2015.
Motors increased its operating return on assets by 1.79% from 2015 to 2016.
This is due to the large increase in the company’s operating income and the
drop in total assets. This show that GM could more effectively manage their
assets in 2016 than in 2015. They had less total assets that year and found a way
to make more income off those fewer assets. This change in assets was likely
due to General Motors eliminating a large portion of assets that do not
contribute to revenue such as assets obtained when acquiring other companies or
eliminating equipment that was in excess (“Return on Operating Assets,” n.d.).
profit margin is a measure of a company’s day to day operating efficiency. It
shows how costs and variable and fixed expenses are being controlled as well as
how effective revenue is being created (Keown, Martin & Petty, 2017). This margin is the
measure of the profits that a company has left over after it has paid its
operating expenses and depreciation costs. It is calculated by dividing the
operating profits by the sales. GM’s operating profit margins are as follows:
operating profits/sales. $9,545,000,000/$166,380,000,000 = 5.74% for 2016.
$4,897,000,000/$152,356,000,000 = 3.21% for 2015.
operating profit margin rose by 2.53% from 2015 to 2016. This is mainly due to
the large increase in their operating profits coupled with a smaller increase
in total sales. This margin can tell many things. Some of the more important
things being GM’s ability to satisfy its creditors and create wealth for the
shareholders (“Operating Margin,” n.d.). By increasing their margin, GM is
generating more operational cash flow to contribute to debt and increase funds
available to common stockholders (“Operating Margin,” n.d.). It shows that they
are lowering their financial risk, by putting more money in their pockets.
Total Asset Turnover
& Fixed Asset Turnover:
The total asset turnover
ratio measures a company’s ability to use its assets effectively to generate
sales. This ratio can tell investors what companies are deploying their assets
effectively (Keown, Martin
& Petty, 2017). It is calculated by dividing the sales for the year
by the total assets for that same year (“Asset Turnover Ratio,” n.d.). For
General Motors the calculations are as follows: sales/total assets. $166,380,000,000/$221,690,000,000
= .75X for 2016. $152,356,000,000/$194,338,000,000 = .78X for 2015. General
Motors decreased their total asset turnover from 2015 to 2016 by .03X. This,
although a small decrease, is a step in the wrong direction for the company.
The higher the asset turnover ratio is for a company, the more money they are
bringing in for every dollar in assets they have (“Asset Turnover Ratio,” n.d.).
The drop in this ratio can be contributed to the large increase in total assets
that GM had from 2015 to 2016 along with the smaller increase of sales. Thus,
the increase in sales was not enough to offset their rise in total assets. This
increase in assets could be due to the company’s anticipation of larger growth
over the next few years. In this anticipation, the company may have purchased
more assets to accommodate for the growth (“Asset Turnover Ratio,” n.d.).
like the total asset turnover ratio shows how well a company is using its total
assets, the fixed asset turnover ratio shows how well a company is using its
fixed assets to make money (Peavler, 2016). This ratio shows how lucrative the
company’s investments in plat, property and equipment have been for a given
year. It is calculated by dividing the total sales for a given year by the net
fixed assets for that year (Peavler, 2016). General Motor’s fixed assets
turnover ratio is as follows: sales/net fixed assets. $166,380,000,000/$70,346,000,000
= 2.37X for 2016. $152,356,000,000/$51,401,000,000 = 2.96X for 2015. GM’s fixed
asset turnover has decreased by .59X from 2015 to 2016. This increase is due to
the substantial rise in net fixed assets from 2015 to 2016. Although there was
a rise in sales, it was not enough to compensate for the rise in net fixed
assets. This increase in fixed assets could be the result of GM investing in
one of its plants for re-tooling or modernization (Peavler, 2016). Hopefully,
this re-tooling and modernization is a sign that a new product is about to be
issued which should increase sales.