Analytical Review Of Financial Position & Reporting General Motor Company – For The Year Ended 31-Dec-2014

Assignment Background

The assignment aims to present capability of a student to understand and analyze the financial information related to a company listed on an international stock exchange and objectively exhibit its financial position and performance on the basis of available financial and market information. The key objective of the assignment revolves around comprehending the operational performance of the company by utilizing important analytical tools such as ratio analysis and vertical & horizontal analysis. This report has been prepared from a prospective investor’s point of view.

 

Introduction

The organization that has been selected for the purpose of performing financial analysis is General Motors Company (The Company). Published financial statements of the company for the year ended 31-Dec-2014 have been used as primary source for data collection in addition to somewebsites such as NY Stock Exchange, CNN Money etc. General Motors Company is one of the world’s largest manufacturers of cars and trucks producing wide range of products such as Chevrolet, Buick, Cadillac, Isuzu, Jiefang, Opel etc. in 37 countries across the world. The Company was founded more than a hundred years ago in 1908 by William C. Durant and Charles Stewart Mott. It is listed on the New York Stock Exchange (NYSE) with market capitalization of $53.77 Billion on December 15, 2015[1].

 

The company went into bankruptcy in 2009 and was given a bailout package of $50 Billion by the US Government. This report captures the key profitability and other financial milestones achieved by the Company during recent years.

 

For the purpose of comparison, financial results of Ford Motor Company have been analyzed for the period ended 31-Dec-2014.

 

Executive Summary

Ford has demonstrated good prospects since coming out of bankruptcy and its sales volume has been on a rising trend since 2010. However, it had to recall millions of vehicles due to faulty ignition switch issues that also resulted in incurring of billions in additional expenditure. As a result, company’s profitability has gone down and it has become more leveraged entity as compared to last year. This calls for a cautious approach while investing in its shares as another similar incident will further shake the confidence of prospective buyers. All major financial indicators related to 2014 are showing an adverse trend as compared to last year however this has generally been the industry trend as shown by the results of Ford Motor Company.

 

 

 

 

 

 

Key Financial Performance Indicators

 

Part A - Profitability, Liquidity & Debt Ratios

 

Profitability Ratios

The financial results of the company have shown a marginal increase of 0.32% in Net sales over the last year. Sales revenue during last five years (2010-14) has increased by 15%, where majority of increase in sales revenue (11%) occurred during 2011.However, Ford Motor Company (Ford) has witnessed a 2% decline in sales volume during the year which suggests that General Motors Company has performed relatively well as compared to its competitors. Slow sales growth during 2014 has been mainly attributed to the issues related to ignition switch malfunctioning in its vehicles which resulted in the announcement for recall of as many as 30 million vehicles from the markets[2]due to which the Company has been forced to incur additional expenses of $4 Billion.

 

Gross Profit Margin

This ratio calculates the percentage of gross profit to sales, providing the primary measure of profitability.

 

Gross Profit x 100

Net Sales

 

Gross profit of the company has decreased from 13% in 2013 to 11% in 2014. Decrease in this ratio is mainly due to the fact that its sales increased by a mere 0.32% from last year whereas cost of sales increased by 2.30%, completely offsetting the increase in sales volume.Further, additional costs related to vehicles recall caused profit margin to fall during 2014. Ford on the other hand has recorded gross profit of 14% during 2014 (2013: 15%).

 

Profit before Tax

This ratio calculates the percentage of net profit to sales, providing a commonly used measure of profit margin.

 

PBIT           x 100

Net Sales

 

The company earned a pre-tax profit of $4.246 Billion during 2014 as against $7.458 Billion in 2013. This represents a decline of 76% from last year. The profitability of the company has taken a hit due to the fact that adjustments of around $1.3 Billion have been booked during the year for estimated expenses related to vehicles recall campaign[3]. Profit before Tax of Ford has also declined by 62% during the year.

 

Return on Capital Employed

This ratio assesses how efficiently an entity is using its resources.

 

PBIT                    x 100

Capital Employed

 

 

The Company was maintaining a high ratio of 18% ROCE in 2013 which has come down to 13% during 2014. This was expected as profitability of the company has come down during the year.ROCE of Ford has also shown declining trend from last year (41% to 32%).

Asset Turnover

This ratio measures the efficiency of the company in terms of how well the assets of the company are used to generate sales.

 

Net Sales    s

Total Assets

 

The company’s asset turnover ratio has changed from 0.93 times (2014) to 0.88 times (2014). The declining trend may be attributed to the current market condition as the competitors have even failed to improve sales volume from last year.

 

 

Liquidity Ratios

Liquidity analysis of a company is a vital parameter to analyze its working capital management, long term viability and to ascertain prospects of it remaining a going concern. Sometimes, a company appears to be performing well when actually it might be involved in overtrading.

 

Current Ratio

This ratio calculates ability of a company’s current assets to meet its current liabilities.

 

Current Assets      

Current Liabilities

 

Current ratio of the company is 1.27 in 2014 as compared to 1.31 in 2013 which is a 2% decline from last year. The already marginal current ratio is showing the pressure on the company’s current assets to meet its short term liquidity requirements.The Company’s Equipment on Operating Lease more than doubled during 2014 due to which liabilities have inflated. Ford however has improved it from 1.39 to 1.41 which indicates its better working capital cycle management.

 

Quick (Acid Test) Ratio

It calculates capability of a company’s liquid assets to meet its immediate cash needs, as non-cash current assets may take time to liquidate in case of an urgent requirement. Therefore, inventory is eliminated from current assets to calculate actual short term liquidity situation of the company.

 

Current Assets – Stock           x 100

Current Liabilities

 

Quick ratio of General Motors has maintained almost the same Acid Test ratio during 2013-14 i.e. at 0.9 times (2014: 0.86 | 2013: 0.88). Ideally, this ratio should be over 1 where it is assumed to be safe for a company in the near future. Ford again has an impressive 1.34 quick ratio for 2014 which indicates that General Motors Company needs to place enhanced focus in this area.

 

 

 

Activity Ratios

With an aim to further probe the liquidity of General Motors, activity ratios have been calculated which indicate the company’s efficiency in managing its debtors, creditors and inventory.

 

Debtor’s Days

This ratio measures the number of days, company cash is tied up with its debtors.

 

Trade Debtors x 365

Sales

 

The company seems to be getting paid by its debtors after 60 days during 2014 as compared to 54 days during 2013. Consumer receivables of GM Finance have increased by 13.61% during the year, seemingly as an effort to increase sales volume of the Company. As a result, debtor’s days have increased. This is on a higher side and needs to be brought down to 30 days by the Company.

 

Creditor’s Days

This ratio measures the number of days the company defers payment to its creditors.

 

Trade Creditors x 365

Cost of Sales

 

The company is maintaining it at par with debtors’ days i.e. at 60 days during 2014 whereas it was 64 days during 2013 which is again an adverse sign for the company.Ford here has improved from 57 to 59 days.

 

Inventory Turnover

This ratio measures the average number of days inventory is held by the enterprise.

 

Average Stock x 365

Cost of Sales

 

On average, company is keeping its inventory for 36 days this year whereas it was 38 days previously, which shows an improvement from the last year. Ford is managing inventory well by maintaining it at 23 days.

 

Cash Operating Cycle

This cycle tends to show the days it takes a company to manage its working capital cycle.

 

Debtor days + Stock days – Creditor days

 

Cash operating cycle of General Motors has increased from 28 days last year to 36 days during 2014.0

 

 

Structural Ratios

 

Debt Ratio

This ratio portrays the proportion of liabilities the company is obligated by compared to the assets it holds.

 

 

Total Debt        x 100

Total Assets

 

The company’sdebt ratio has increased from 22% to 26% this year whereas Ford has maintained it at 57%. The Company got two revolving credit facilities in October 2014, increasing limits by $2.5 Billion. In November 2014, unsecured loan notes of $2.5 Billion were issued. Similarly, GM Financials issued loan notes of $3.5 Billion, CAD 400 Million and Euro 500 Million during the year. These loans seem to have been taken to invest in the Europe market where the company is planning to launch 27 new models and 17 new engines by 2018.

 

Debt Equity Ratio

This ratio also called the gearing ratio measures the composition of the capital structure of an entity. It also shows to what extent the company is financed by external debt.

 

Total Long Term Debt                                                   x 100

Total Share Holder’s Equity + Long term Debt

 

The Company’s leverage ratio is gone up from 34% to 47% during the year which should worry the management and shareholders.However, ambitious plans of the company for expansion in Europe and China have resulted in issuance of multiple unsecured loan notes during 2014 which has caused this ratio to increase. Ford has this ratio at 73% for 2014.

 

Interest Cover

This ratio calculates the profit cover the company provides to meet its financial charges

 

PBIT S

Interest charge

 

The Company’s interest cover is showing 12 times cover which seems quite adequate. However, it was 23 times last year which means that it has halved during 2013-14 which must be a worrying sign for the company. Ford on the other hand is only maintaining it at 2 times for 2014.

 

 

Part B - Market Ratios

Majority of the shareholders of listed companies are interested in earning dividend and / or capital gain through increase in share price. This aspect makes it important for companies to not only perform better every year but to keep the shareholders satisfied through announcement of dividends, right and bonus shares and future expansion plans etc.

 

Following ratios are generally used by investors for the purpose of calculating return on their investment and to analyze overall performance of a company.

 

Earning Per Share (EPS)

This ratio calculates the earnings per share attributable to the ordinary shareholders.

 

Net Profit (Loss) attributable to Ordinary Share Holders

Weighted Number of Ordinary Shares

 

 

EPs of the Company has deteriorated by 35% as compared to last year (2014: 1.75 | 2013: 2.71). EPS of Ford has also declined from 1.83 to 0.81

 

 

 

Dividend Cover

This ratio assesses the number of times an organization can pay dividends to its shareholders from profit earned during the year.

 

Earning per ShareS

Dividend per Share

Dividend cover of the Company is 1.46 for 2014 whereas no dividend was declared last year. Ford’s Dividend Cover in comparison has come down to 1.62 in 2014 from 4.58 in 2013.

 

P/E Ratio

The Price Earningratio compares a company’s share price with its EPS to determine the value of investment required in a company’s shares for getting $1 in return.

 

Market Value Per Share

Earning Per Share

 

P/E of the Company is $19.95 in 2014, up from $15.08 in 2013. Ford’s P/E has also increased to more than double during the same period (8.43 to 19.14).

 

 

Conclusion

2014 has been a tough year for automobile sector in the US and generally profitability of companies has gone down from last year. Vehicles sales of General Motors have shown an increasing trend as compared to competitors such as Ford which saw a 2% decline in sales volume during this period. However, cost of sales of General Motors has gone up at an advanced rate (2%) which has adversely impacted company’s profitability. The situation for General Motors further deteriorated due to switch ignition issues that forced it to recall millions of vehicles. This step not only hampered sales volumes but also led to incurring of expenses to the tune of billions of dollars. As a result, Company’s profitability suffered during the year (EPS 1.75 vs 2.71). Further, the company has issued unsecured loan notes worth billions during the year to finance its investment plans, especially in Europe. Enhanced reliance on short and long term financing during the year is reflected by 17% increase in interest expense and worsening debt related financial ratios.Considering the history of General Motors Company, this is a sign of concern for prospective investors as it may lead to further reduction in profitability if corrective measures and control over safety standards of the vehicles is not ensured.

 

 

 

 

 

 

 

References

 

 

https://www.nyse.com/quote/XNYS:GM

http://corporate.ford.com/annual-reports/annual-report-2014/index.html

http://www.gm.com/company/aboutGM/our_company.html