FIN 330 7386 Research Project 1 Keith Lauren Dakota James PDF

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General Motors (NYSE:GM) FINC 330: Section 7386 Research Project Part 1 Lauren Downing, Dakota Eaton, James Reddy, and Keith Crook Professor Sharon Liron April 20, 2021

Part I: Introduction Understanding a company’s financial stability is one of the most important tasks when reviewing its ability to stay in operation for the short and long term. A company like General Motors (also identified as “GM” throughout this analysis) who operates in a very competitive market should take the time to review the financial statements and understand the position of the organization in the market. Throughout this paper the purpose will be to understand how GM has positioned themselves in the market against tough competitors and understand where room for improvement may be. The organization suffered bankruptcy in 2009. Since that time the need to improve and innovate has become more crucial than ever. Let’s start by taking a look at the trend analysis for GM in years 2016 through 2020.

Part II: Trend Analysis GM’s Sale Growth trend has been on the decline for the last several years. After analyzing data provided by MarketWatch (2021), and using excel to find year-over-year growth rates, the following trend information has been determined for GM. In 2019 GM had -6.67% growth and in 2020 they fell even shorter to -10.75% growth. This is based off of a 2016 benchmark of $149.18 billion in sales/revenue for GM. The Cost of Goods Sold Growth has also declined in the last several years. In 2019 GM saw a -7.29% decline in their costs of goods sold growth and in 2020 a -12.16% decline. This is based off a benchmark in 2016 with $122.27 billion costs of goods sold including depreciation and amortization. The gross income growth for GM suffered a major decline in 2018 with -14.24%. Since this time, it is still in the negative but is slightly better. In 2019 GM stood at -3.12% and 2020 has crawled to a -3.02%. In 2016 GM had a gross income of $26.92 billion which unfortunately has declined since this period. The

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Interest Expense Growth has seemed to incline by a lot over the last year reaching a high of 40.41% from their 2016 mark of $563 million to $1.1 billion in 2020. From 2019 to 2020 the interest expense percentage more than doubled. GM has a Net Income Growth that went through a major increase but has stabilized since this time in 2018. Cash & Short-Term Investments Growth seems to alternatively increase or decrease each year. GM experienced a decrease of -0.88% in 2017 and an increase of 13.00% in 2018. A decrease of -7.95% occurred in 2019, followed by an increase of 18.89% in 2020. The cash has an increase from 2016 to 2017 and then again in 2017 to 2018 where it stabilized and did not fluctuate much staying in the mid-range of $22 billion. In 2020, short-term investments nearly doubled from the previous year, causing a significant increase. Total Asset Growth has remained at an increase for the last three years after having a decrease of -4.15% in 2017. This is important for organizations to have not only growth in revenue and investments but their assets as well. Assets allow a company to have value beyond just their cash in hand.

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Growth- Income Statement 2020 2019

Years

2018

2017 2016 -20

-10

0

10

20

30

40

50

Growth Rate(%) Sale Growth

COGS growth

Gross Income

Interest Expense Growth

Graph 1: GM Growth-Income Statement

Growth- Balance Sheet 2020

Years

2019

2018 2017

2016 -10

-5

0

5

10

15

20

25

Growth Rate(%) Cash-S/T growth

Total assets growth

Graph 2: GM Growth – Balance Sheet

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Part III: Financial Ratio Analysis Financial Ratio Analysis Period

1 2/2020

1 2/2019

1 2/18

1

1 2/16

2/17

Liquidity Ratios Current Ratios

1 .01

Quick Ratios

0 .88

. 79

. 92

. 67

. 89

. 73

. 89

. 68

. 66

Operating Performance Ratio Days of Sales Inventory

00.79

Days of Sales Outstanding

4.61

Days of Payables

8.67

Receivables Turnover

.62

Inventory Turnover

0.55

Fixed Assets Turnover

.55

Total Assets Turnover

1

8 8.83

3

2 9.93

6

2

6

3 1 1 .

1

1.

.

1 0.53

1. 95

. 67

5 .73

0.31

82

60

4.

1

1

6 4.16

82

2.98

.68

7

4.

1

3 4.65

3.71

74

2.19

3

6

4

6 3.72

5.41

3.45

.11

7 5.70

8.11

4.13

53

7 7.05

2 .73

. 67

. 80

Profitability Ratios Gross Profit Margin

1 1.16

Operating Profit Margin

5 .42

3

5 .10

9. 59

.99

Net Profit Margin

1 0.18

3. 02

4 .80

1 3.46 6. 88

5. 38

1 2.77 5 .74

2.67

5 .67

Return on Investment ROA

2 .70

2 .89

3. 60

1.79

4 .53 5

ROE

1 4.39

1 6.32

2

-

1.43

2

9.84

2.52

Table 1: General Motors Financial Ratio Analysis, 2016 – 2020, Morningstar

The next part of this analysis will consider the operating income for GM. The period that will be considered will be from 2016-2020. The first piece of data that will be analyzed will be the current ratio of GM. The current ratio is used to determine a company’s liquidity. If a company has a current ratio over 1.0, this means that the company has assets left over after all of the company’s liabilities have been paid off. In reviewing Table 1, we can see that the company continued to excel in their liquidity from 2016-2019. In 2019 General motors current ratio fell .04 to .88 percent but then made a gain to 1.01 percent in 2020. The gain in 2020 was GM beating Q3 expectations due to increased sales in trucks and SUVs in North America (Wayland, 2020).

Profitability Ratio 16 14 12 10 8 6 4 2 0 -2

2020

2019

2018

2017

2016

-4 Gross Profit Margin

Operating Profit Margin

Net Profit Margin

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Graph 3: Profitability Ratio, 2016-2020, Morningstar.

The next portion of this analysis consider the profit ratio. If someone is looking to invest in a company, they will want to ensure that the company is profitable, and that the management of that company continue to increase profit of that company. Graph 3 highlights the gross profit margin, operating profit margin, and net profit margin for GM from 2016-2020. Considerable review of the data presented in the graph shows a net profit margin of -2.67 in 2017. In the same year, GM took a $3.9 billion loss due to not only new tax laws for that year, but the company was also losing money due to the European business it sold that year (Naughton, 2017). Since 2017, GM’s net profit margin stayed around 4 to 5 percent and the gross profit margin continued to rise from 9.59 percent to 11.16 percent in 2020. Since 2017’s drop in net profit margin, it appears that GM has steadily increased its profits. According to analysts, the company’s stock has remained undervalued. GM is looking to launch 30 new electric vehicles and eliminate tailpipe emissions for light-duty vehicles by 2035 (Trainer, 2021). They also plan to release the new GMC Hummer EV which is all electric and will compete with the Ford’s Raptor and Dodge’s TRX. If GM continues with this plan, they will see themselves competing with companies such as Tesla which has become the largest automaker in the world by market value (Stevens, 2021).

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Part IV: Return on Equity Using the DuPont Analysis A) General Motors’ Financial Ratios (NYSE:GM) 2020

2019

2018

ROE

14.39%

16.32%

21.43%

Net Profit Margin

5.10%

4.80%

5.38%

Asset Turnover

0.53%

0.60%

0.67%

Financial Leverage

5.22%

5.46%

5.85%

Debt/Equity Ratio

1.64%

1.60%

1.88%

Table 2: General Motors Co Financial Ratios (2018-2021) Morningstar

B) GM’s Competitor: Ford Motor Co Financial Ratios (NYSE:F) 2020 ROE

-4.00%

Net Profit Margin

-1.01%

Asset Turnover

0.48%

Financial Leverage

8.71%

Debt/Equity Ratio

3.63%

Table 3: Ford Motor Co Financial Ratios (2018-2021) Morningstar

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Table 2 in the previous section represents several of GM’s financial ratios over the past three years, (2018 – 2020 fiscal years). GM’s overall ROE, or Return on Equity, has declined by an estimated 7.04% in the past three years. This indicates that the company is not efficiently using its equity to create profits. To break down the ROE, consideration is given to the Net Margin, Asset Turnover, and Financial Leverage. Asset Turnover appears to be the greatest contributor to the decline in ROE. The data in the table shows sales income created by GM’s assets have declined over the years. The company will need to determine a way to better use its assets to increase its overall sales. The debt/equity ratio for the company exceeds 1% and appears to have followed a similar trend over the three-year analysis period. This level of debt could be a result of industry standards, where as an auto manufacturer, GM could be slightly more dependent on debt for its operations than its equity. To analyze GM’s financial ratios further, Table 3 can be used to compare GM’s ratios to that of one of its closest competitors, Ford Motor Co. For 2020, Ford Motor Co. had a negative ROE, meaning that the company failed to earn any returns on its equity. Ford Motor Co. also failed to earn income for the year of 2020, as shown in the company’s negative profit margin of -1.01%. For 2020, Ford’s financial leverage exceeds that of GM by 3.49%. In comparison to GM, Ford is much more dependent on debt financing than it is on equity financing. Ford’s debt/equity ratio is 3.63%, nearly 2% higher than that of GM. Overall when comparing each company’s financial ratios for 2020, GM appears to be in a better financial standing than its

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competitor Ford. Still, to improve the return on equity, GM’s management team should consider using more debt financing for its operations rather than its equity.

Part V: Specific Recommendation After careful consideration of the financial information presented in this analysis, it can be stated that General Motors is one automotive company that should be financially stable for the next two to three years. Over the last three years, GM has done a great job keeping their Return on Equity (ROE) solid. ROE is used by many investors to determine whether to invest in a company. The ratio shows the profitability of a particular company by diving a company’s net income by shareholders equity (Fernando, 2021). Although it was higher in 2018 with a 21.43%, they still managed to remain sturdy in 2020 at 14.39% even with a global pandemic going on. Because an investor cannot simply use these stand-alone figures to determine if a company is worth an investment, they will need to compare them to another company’s ratios, as well as consider the industry average. In this case, an investor should notice that they will be able to see a return on their investment even though GM has a debt-to-equity ratio greater than 1. Some investors may see that GM has been taking on more debt in order to invest back into the company. The debt-to-equity ratio is important to pay attention to as an investor since it will show how a company is financing its operations through debt or funds they own (Fernando, 2021. Sometimes it is thought to be better to fund operations with money the company already has. However, it can also be very beneficial to use debt that can assist more if the company feels they will be able to pay it off in the future. Debt financing should only be considered if the 10

company expects income enough to pay(off) the debt(s) being used. The goal is to turn the investments into more equity with the hope of attracting more investors by showing that they are able to take on some debt and manage to make a profit, all while increasing GM’s financial status. This also shows investors that GM has a strong management team. One year that investors may have strayed away from GM was in 2017. GM took a big hit on their net income causing it to become negative. GM reported that they had a net loss of $4.9 billon from a profit of $2.1 billion in 2016 (Ferris, 2018). While this may scare off some investors initially, further research shows that GM was looking to change their production from sedan type vehicles to SUV much like their competitor Ford was doing at the time (Ferris, 2018). Companies often take a hit on their net income when a specific type of product, in GM’s case a particular model of a car, is no longer trending. Luckily, GMs strong management team noticed a trend when it came to electric cars and decided they would invest $1 billion towards autonomous vehicles (Ferris, 2018). However, it should be known that GM is unfortunately declining when it comes to their annual net income since 2017 but has managed to recover a little keeping their net income pretty steady since their major hit in 2017. With their management team gearing their focus towards crossovers, SUVs and autonomous vehicles, there should be a slight increase in their net income over the next few years. If they continue to eliminate the products that are not selling, GM will have more money to improve their current popular models in order to gain more revenue over time. Part VI: Reflection GM is one company that has managed to remain in line or at some points ahead of their major competitors like Ford Motors. When the company was founded in 1908, GM was only responsible for Buick vehicles but now they own very popular models such as Cadillac, Pontiac, 11

Chevrolet, etc. which can be found on the road every day. (Kollewe, 2009). Investors should know by now that their money is in the right hands when they decide to invest in GM. By taking the time to analyze GM ratios/ financials, an investor will see that GM has been taking great strides to recover from their slip up in 2017. They will also see that GM has many plans in place to become one of the more popular autonomous vehicles in the near future. GM has a goal to have a future that involves zero crashes, emission, as well as congestion (Why All AVs Should Be EVs, n.d.). This would not only safe lives of those who are driving on the road, but also help protect those in the younger generation with pollution. One last huge piece of information an investor should look at is the recent message from the President of General Motors about GM relaunching the Hummer, but have it reinvented to be electric (Reuss, n.d.). Hummers were and kind of still are very popular vehicles, meaning there is a higher chance GM will have a huge revenue increase in the future. This project allows students to understand what the trends are when it comes to a particular companies financials such as, General Motors. Without this class, student would not have the knowledge to make a sound decision when it comes to investing in certain companies. By taking a look at a company’s net income is not enough information for an investor. Information such as a company’s ROE and debt-to-ratio, allows an investor to grasp where the company is predicted to go in the future. People who like to do long-term investing, love these type of numbers because they want to ensure their money is being put into the right spot and will not decrease over time causing a loss. Using these numbers, students as well as investors are able to see if a company like GM could handle a pandemic such as COVID-19. Which, they have shown they are able to continue business without too much of an impact financially.

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References Fernando, J. (2021, April 8). Return on Equity – ROE. Investopedia. Retrieved April 15, 2021 from https://www.investopedia.com/terms/r/returnonequity.asp Fernando, J. (2021, April 8). Debt-To-Equity (D/E). Investopedia. Retrieved April 15, 2021 from https://www.investopedia.com/terms/d/debtequityratio.asp Ferris, R. (2018, February 6). General Motors beats expectations on strong crossover sales and cost control. CNBC. Retrieved April 18, 2021 from https://www.cnbc.com/2018/02/06/general-motors-q4-2017-earnings.html General Motors Company. (n.d.). Why All AVs Should Be Evs. Retrieved April 19, 2021 from https://www.gm.com/masthead-story/electric-vehicles-AV-EV.html Kollewe, J. (2009, April 30). The history of General Motors. The Guardian. Retrieved April 19, 2021 from https://www.theguardian.com/business/2009/apr/30/general-motors-gmhistory MarketWatch. (2021). General motors co.: Financials. Retrieved April 18, 2021 from https://www.marketwatch.com/investing/stock/gm/financials?mod=mw_quote_tab Morningstar (2021) General Motors CO (GM). Morningstar. Retrieved from http://financials.morningstar.com/ratios/r.html?t=GM®ion=usa&culture=en-US Morningstar.(2021). Growth, Profitability, and Financial Ratios for Ford Motor Co (F). Retrieved from (https://financials.morningstar.com/ratios/r.html? t=0P0000029A&culture=en&platform=sal

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Morningstar.(2021). Growth, Profitability, and Financial Ratios for General Motors Co (GM). Retrieved from https://financials.morningstar.com/ratios/r.html? t=0P0000RQZL&culture=en&platform=sal Naughton, N. (2017). GM posts strong 2017 despite loss. The Detroit News. Retrieved from https://www.detroitnews.com/story/business/autos/general-motors/2018/02/06/gmannual-earnings/110146218/ Reuss, M. (n.d.). Electric Trucks are Key To a Zero-Emissions Future. Retrieved April 19th, 2021 from https://www.gm.com/masthead-story/hummer-electric-truck-ev.html Stevens, P. (2021). Tesla tops Toyota to become largest automaker by market value. CNBC. Retrieved from https://www.cnbc.com/2020/07/01/tesla-tops-toyota-to-become-largestautomaker-by-market-value.html Trainer, D. (2021). General Motors Is Worth the Wait. Forbes. Retrieved from https://www.forbes.com/sites/greatspeculations/2021/03/02/general-motors-is-worth-thewait/?sh=3ccd931290a8 Wayland, M (2020). General Motors shares gain after truck sales deliver big earnings beat in third quarter. CNBC. Retrieved from https://learn.umgc.edu/d2l/le/content/563045/viewContent/20789380/View

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