General Motors – Financial Ratio Analysis Essay, Research Paper

General Motors – Financial Ratio Analysis

I. General Motors History Highlights

In its early years the automobile industry consisted of hundreds of firms, each

producing a few models. William Durant, who bought and reorganized a failing

Buick Motors in 1904, determined that if several automobile makers would unite,

it would increase the protection for the group. He formed the General Motors

Company in Flint, Michigan, in 1908.

Durant had bought 17 companies (including Oldsmobile, Cadillac, and Pontiac) by

1910, the year a bankers’ syndicate forced him to step down. In a 1915 stock

swap, he regained control through Chevrolet, a company he had formed with race

car driver Louis Chevrolet. GM created the GM Acceptance Corporation (auto

financing) and acquired a number of businesses, including Fisher Body,

Frigidaire (sold in 1979), and a small bearing company, Hyatt Roller Bearing.

With the Hyatt acquisition came Alfred Sloan, an administrative genius who would

build GM into a corporate colossus.

Sloan, president from 1923 to 1937, implemented a decentralized management

system, now emulated worldwide. The auto maker competed by offering models

ranging from luxury to economy, colors besides black, and yearly style

modifications. By 1927 it had become the industry leader.

GM introduced a line of front-wheel-drive compacts in 1979. Under Roger Smith,

CEO from 1981 to 1990, GM laid off thousands of workers as part of a massive

companywide restructuring and cost cutting program.

In 1984 GM formed NUMMI with Toyota as an experiment to see if Toyota’s

manufacturing techniques would work in the US. The joint venture’s first car was

the Chevy Nova. GM bought Ross Perot’s Electronic Data Systems (1984) and Hughes

Aircraft (1986). In 1989 the company bought 50% of Saab Automobile.

In 1990 GM launched Saturn, its first new nameplate since 1926, reflecting a new

companywide emphasis on quality. Two years later it made the largest stock

offering in US history, raising $2.2 billion. Culminating a period of boardroom

coups (relating to the company’s lagging effort to reduce costs) in the early

1990s, John Smith replaced Robert Stempel as CEO.

NBC apologized in 1993 for improprieties in its expose alleging that GM pickups

equipped with “sidesaddle” gas tanks tended to explode upon side impact. The

government nonetheless asked the company to recall 4.7 million trucks. A

unanimous federal appeals court in 1995 overturned the settlement of a national

class action suit involving the pickups. That year GM sold its National Car

Rental business to a group of investors led by former Chrysler executive William

Lobeck.

In 1996 the United Auto Workers struck at 2 GM plants in Ohio over the company’s

increasing its outsourcing of brake parts. The strike lasted 17 days, idling 24

of the automaker’s 29 North American plants (reflecting the vulnerability of

just-in-time supply chains), and ended with neither side satisfied.

GM sued Volkswagen in 1996, alleging the German automaker encouraged former GM

executive Ignacio Lopez to defect to Volkswagen with boxes of proprietary

company information. The bitter dispute led to Lopez’s resignation from

Volkswagen and was resolved in early 1997 when VW agreed to pay GM $100 million

and purchase $1 billion of parts from GM over 7 years. In 1996 GM spun off EDS

(with a market value of $27 billion) to shareholders. Also that year GM agreed

to sell 4 of its parts plants to Peregrine Inc. (formed by investment firm

Joseph Littlejohn & Levy) for an undisclosed amount. In late 1996 GM began

producing Chevrolet Blazers in Russia.

II. General Information

Competitors

BMW, British Aerospace, Chrysler, Daimler-Benz, Fiat, Ford, Honda, Hyundai, Kia,

Motors, Mazda, Mitsubishi, Nissan, PSA Peugeot Citroen, Renault, Suzuki, Toyota,

Volkswagen and Volvo.

Nameplates

Buick, Cadillac, Chevrolet, Geo, GMC, Oldsmobile, Opel/Vauxhall, Pontiac and

Saturn.

Other Operations Delphi Automotive Systems (vehicle components) General Motors

Acceptance Corporation (financing and insurance) Hughes Electronics Corporation

(electronic systems) International Operations (autos for foreign markets) North

American Operations (autos for North America)

III. Statistics & Financial Summary

Products/Services

1995 Sales

$ mil. % of total Manufactured

products 143,666 85 Financial services

11,664 7 Computer systems services 8,531

5 Other 4,968 3 Total

168,829 100

1995 Vehicle Unit Deliveries No. (000’s) % of total US

4,895 59 Europe

1,725 21 Latin America, Africa & the Middle East 647

8 Asia & Pacific 624 7 Canada

385 5 Mexico

48 0 Total 8,324

100

Financial

1993 1994 1995 Sales ($

mil.) 133,622 150,592 163,861 Net income ($

mil.) 2,466 5,659 6,933 Income as % of sales

1.8% 3.8% 4.2% Earnings per share ($)

2.13 6.20 7.28 Stock price – high ($) 57.13

65.38 53.13 Stock price – low ($) 32.00

36.13 37.25 Stock price – close ($) 54.88 42.13

52.88 P/E – high 27 11

7 P/E – low 15 6 5

Dividends per share ($) 0.80 0.80 1.10 Book

value per share ($) 5.28 11.64 18.05 Employees

750,000 692,800 709,000

1995 Year End * Debt ratio: 61.1% * Return on equity: 29.7% * Cash ($ mil.):

11,044 * Current ratio: 1.70 * Long-term debt ($ mil.): 36,675 * No. of shares

(mil.): 753 * Dividend yield: 2.1% * Dividend pay out: 15.1% * Market value ($

mil.): 39,819

IV. Financial Ratios

Ratio

95

94

93

Formula

LIQUIDITY

Net Working Capital (000’s)

8,730

11,805

1,415

Current Assets – Current Liabilities

Current Ratio

1.13

1.19

1.01

Current Assets / Current Liabilities

Quick Ratio

0.92

0.99

0.91

(Current Assets – Inventory) / Current Liabilities

ACTIVITY

Inventory Turnover

9.04

9.45

12.35

Cost of Goods Sold / Inventory

Average Collection Period

48.69

46.91

52.94

Accounts Receivable / Avg Sales Per Day

Average Payment Period

N/A

N/A

N/A

Fixed Asset Turnover

2.50

2.75

3.90

Sales / Net Fixed Assets

Total Asset Turnover

0.83

0.84

0.79

Sales / Total Assets DEBT

Debt Ratio

0.88

0.92

0.96

Total Liabilities / Total Assets

Debt Equity Ratio

1.59

2.97

6.16

Long Term Debt / Stock Holders Equity

Times Interest Earned Ratio

1.78

1.49

0.48

Earnings before interest & Taxes / Interest

Fixed Payment Coverage Ratio

N/A

N/A

N/A

PROFITABILITY

Gross Profit Margin

0.25

0.22

0.20

(Sales – Cost of Goods Sold) / Sales

Operating Profit Margin

0.07

0.07

0.04

Operating Profits / Sales

Net Profit Margin

0.04

0.03

0.02

Net Profits After Taxes / Total Assets

Return on Total Assets (ROA)

0.03

0.03

0.01

Net Profits After Taxes / Stockholders Equity

Return on Equity (ROE)

0.29

0.38

0.44

Net Profits after Taxes / Stockholders Equity

Earnings per Share

7.21

5.15

2.13

Market Price P/ Share of Common Stock / EPS

Price/Earnings Ratio (P/E)

N/A

N/A

N/A

Note : Financial Statements are attached V. Ratio Analysis

Liquidity

General Motors overall liquidity has decreased when compared to 1994,

but is still at a much higher level when compared to 1993. Their net working

capital has increased 516% compared to 1993.

Their ability to meet short term obligations is also higher than 1993 by

12 basis points, but is lower than 1994 mainly because their current liabilities

increased in a higher pace than their current assets.

The Quick Ratio otherwise did not follow the same trend as the previous

ratios, where the difference to 1993 is of only 1 basis point. The difference

here is mainly because of the higher amount in inventories that may indicate an

increase in inventory prices or volume.

Activity

The inventory liquidity has been declining for the last two years, while

the cost of goods sold increased during the same period. This trend indicates

that the inventory cost or volume has increased.

The accounts receivable has improved when compared to 1993, where it

decreased from 53 to 49 days.

The fixed asset turnover has decreased from 3.90 in 1993 to 2.50 in 1995,

which may indicate a higher investment in fixed assets which are not being

maximized in productivity.

The Total Asset Turnover has been improving for the last two years

because of the better management of current assets..

Debt

The Debt Ratio has decreased for the last two years going from 0.96 to

0.88 mainly due to the reduction of the total liabilities, indicating that the

level of creditor financing has improved.

The stock holders equity has increased dramatically indicating the

better management of the companies equity.

The EBIT has improved for the last two year mainly because the level of

interest paid has decreased due to the reduction of liabilities.

Profitability

The Gross Profit Margin has increased from 1993 to 1994 as the cost of

goods sold did not increase at the same level that the sales increased. The

Operating Profit Margin ratio was stable in 1995 when compared to 1994 and the

Net Profit Margin has also been improving for the last two years.

The Return on Total Assets has increased due the increase in the

companies profitability, while Return on Equity has decreased on the last two

years as the stockholders equity increased

Overall

It is clear that the profitability of the company has been increasing

for the last 2 years, mainly due to the decrease in liabilities, improvement in

accounts receivable and better management of the company debt..

The company also demonstrates that the profitability can be improved

even further by having better inventory management and productivity maximization

on their fixed assets.

ATTACHEMENTS

Financial Statements (America On Line) Last Quote (America On Line) Stock Graph

(2 Years – America On Line)