General Motors’ Financial Statement Analysis

 
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Introduction

First of all, several words about the analyzed company should be said. As it is stated by the General Motors’ annual report:

Simply stated, our objective is to make GM the world’s most valuable automotive company over time by attracting the industry’s most loyal and enthusiastic customers. (“General Motors’ Annual Report 2012”, 2013).

According to the company’s 2012 annual report, the General Motors is a famous company that provides vehicles The company’s target asserts, “We are designing products to win in the marketplace, not just compete, and we’re aggressively pursuing growth opportunities around the world” (“General Motors’ Annual Report 2012”, 2013).  The company has significantly increased its market share on such largest automotive markets as Chinese and the US’s.  

According to the General Motors’ annual report 2013, the company’s net operating revenue increased from -$30.3 billion in 2012 to $5.1 billion in 2013. However, its net income decreased from $6.2 billion in 2012 to $5.34 billion in 2013. It means that despite the growth of total sales, the company’s financial state is impairing. The overall financial analysis of the General Motors will be explored in the current paper.

It should be noted that financial analysis is an interesting subject, which requires examining the company’s financial statements. “Financial statements are the unavoidable source of information of the financial position, performance and cash-flows” (Žager, Sačer, & Dečman, 2012, p.376). Financial analysts perform an analysis of financial statements of an enterprise and provide recommendations for improving the current situation. However, there is no single approach to determine such category as “financial analysis”. Some economists support an opinion that this concept means an analysis of company’s financial state; however, other economists accent on a dynamic approach to determining this category. They consider that this term means an analysis of financial processes, in which an enterprise takes part.

It would be reasonable to provide a clear definition from economic dictionary. According to it,

Financial analysis use and transformation of financial data into a form that can be used to monitor and evaluate the firm’s financial position, to plan future financing, and to designate the size of the firm and its rate of growth. Financial analysis includes the use of financial statement analysis and funds-flow-adequacy ratio (“Business definition for financial analysis”, n. d.).

However, according to the most definitions, financial analysis is “the analysis of the financial statement of a company” (“Business definition for financial analysis”, n. d.).

In addition, examining the General Motors’ balance sheet, we noticed that percentage of cash and cash equivalents in the structure of total assets was practically unchanged, while the percentage of net receivables increased from 21.17% in 2011 to 34.1% in 2012 and to 40.7% in 2013. Generally, percent increase in net receivables cannot be considered as a positive trend, since it, probably, means that the company has problems with its doubtful and hopeless clients.  

Analyzing the company’s income statement, we have noticed that the company’s revenue increased from $150.2 billion in 2011 to $152.2 billion in 2012 and to $155.4 billion in 2013. Possibly, it is a consequence of demand’s increase. However, the company’s net income has decreased in 2013 as compared to 2011, despite the growing of revenue. That is why the company’s effectiveness impaired.

Liquidity Ratios

The current ratio indicates the sufficiency of the company’s current assets to cover its current debt. Thus, this ratio characterizes the company’s ability to cover current liabilities with the help of its current assets. According to the data provided in Table 1, the General Motors’ current ratio increased from 1.21 in 2011 to 1.30 in 2013. It is noteworthy that the value of this ratio responses to the normative values. It means that company’s liquidity is high and it is increasing.

Table 1

The General Motors’ Liquidity Ratios

Liquidity Ratios:

2013

2012

2011

Formula

Current Ratio

1,3058546

1,296414

1,219761

Current Ratio = Current Assets /
Current Liabilities

Quick Ratio (Acid Test)

1,0809139

1,023892

0,950644

Quick Ratio = Current Assets – Inventory /
Current liabilities

Quick ratio is the next indicator that is often used by investors and external users. It is well known that cash is an absolutely liquid asset. Therefore, with large amounts of cash the company does not need to sell merchandise inventories for repaying its debts. This indicator is calculated by dividing such high-liquid assets as cash, short-term investments, and accounts receivables by the number of total current liabilities.

As it is evident from the data represented in Table 1, the General Motors’ quick ratio increased from 0.95 in 2011 to 1.08 in 2013 and, as a result, the company’s absolute liquidity has improved. The value of this ratio exceeds the normal limits and, that is why, the company’s absolute liquidity is very high.

According to the data provided in Table 1, we can conclude that the company’s liquidity ratios were improved in 2013 as compared to 2011. It should be emphasized that the issue of finding the optima ratio between the company’s stability and its effectiveness is the most important task. Therefore, the General Motors’ liquidity ratios can be considered as normal, while profitability ratios should be improved.

Efficiency Ratios

As it is known, there is such popular indicator as an inventory turnover ratio which characterizes a number of times over which the firm’s inventory is sold and replaced. According to the data provided in Table 2, the company’s inventory turnover increased from 10.49 in 2011 to 11.07 in 2013. It means that the General Motors’ effectiveness of using its inventory improved. The main rule is that all indicators of turnover should increase.

Table 2

The General Motors’ Efficiency Ratios.

Efficiency Ratios:

2013

2012

2011

Formula

Inventory Turnover

11,0710877

10,3477

10,4912

Inventory Turnover =
Total Sales / Inventory

Accounts Receivable Turnover

4,68690067

6,379085

10,93553

Accounts Receivable Turnover =
Total Sales / Accounts Receivables

Stock Holding Period (days)

100,056972

86,88695

92,5883

Stock Holding Period (days) = Stockholders’ Equity /
 Total daily sales

Debtors Payment Period (days)

77,8766238

57,21824

33,37745

Debtors Payment Period (days) = Accounts Receivables / Total daily sales

Creditors Payment Period (days)

113,318214

116,2057

115,1913

Creditors Payment Period (days) = Trade payables / total daily sales

Cash Conversion Cycle (days)

49,9451189

45,80719

41,47529

Cash Conversion Cycle (days) = Cash /
Total daily sales

It means that a current situation is improving and the company is developing. Such indicator as the accounts receivable turnover describes a number of times that the accounts receivable is collected during the year. In accordance with the data provided in Table 2, the General Motors’ accounts receivable ratio decreased from 10.93 in 2011 to 4.68 in 2013. It means that the company’s effectiveness of using its accounts receivables impaired during the analyzed period. Day’s sales in receivables ratio shows “the average number of days it takes to collect an account receivable” (“What is the days’ sales in accounts receivable ratio?”, n.d.). According to the data provided in Table 2, the company’s debtors’ payment period increased from 33 days in 2011 to 77 days in 2013. It means that the company has problems with its debtors. However, such indicator as the creditors’ payment period was decreased from 115.19 days in 2011 to 113.31 days in 2013. It means that it became easier for the company to repay its debts. Also, such index as the cash conversation cycle was increased from 41 days in 2011 to 50 days in 2013. It is a negative tendency.

Company’s Capital Structure

Additionally, the company’s solvency can be estimated by using the leverage ratios. Therefore, the next very important indicator of financial stability of any company is the debt ratio. This index is determined by dividing total liabilities over total assets, and it shows the percentage of total liabilities in the structure of assets.

Table 3

The General Motors’ Efficiency Ratios.

Solvency Ratios:

2013

2012

2011

Formula

Debt-to-assets

0,74386212

0,757439

0,736382

Debt-to-assets = Total Debt / Total Assets

Debt-to-equity

2,90414721

3,122669

2,793363

Debt-to-equity = Total debt /
 Total Shareholders’ Equity

Gearing

3,90414721

4,122669

3,793363

Gearing = Assets /
Shareholders’ equity

Therefore, the General Motors’ financial stability was a little bit improved, since debt-to-assets ratio decreased from 0.75 in 2012 to 0.74 in 2013. It means that the company’s debts are 74% of total assets. It is important to mention that such indicator as the debt-to-equity ratio was decreased too. “This ratio is one of the significant measurements of a company’s health that lending institutions look at before extending credit” (Newman, 2013, p.5). That is why the company’s financial stability and solvency can be considered as risky, since thee values of this indicator a little bit exceed the normative values. It should be noted that the company’s state can be deemed as safe, if the value of debt ratio is no more than 50%. As a result, the company has little problems with its financial stability.

Profitability Ratios

In addition, the company’s profitability ratios should be calculated. This group includes different indexes that give the analysts an opportunity to measure the company’s profitability.

Table 4

The General Motors’ Profitability Ratios.                        

 

2013

2012

2011

Formula

 
 

Profitability ratios:

 

 

 

 

 

Return on Total Assets

0,03

0,04

0,06

Return on Total Assets = Profits after taxes /
Total assets

 

Return on Capital Employed

0,0749721

-0,295567

0,10634

ROCE =
Earnings Before Interest and Tax
 / Capital Employed

 

Return on Shareholders’ Funds

0,1254723

0,170732

0,241081

Return on Equity= Net income/
Shareholders’ equity

 
 

Net Profit Percentage

0,0343956

0,040642

0,061154

Net Profit Percentage=Net profit/
total sales

 

Gross Profit Percentage

0,1161574

0,071019

0,127133

Gross Profit Percentage= Total sales – Purchases /Total sales

 

Operating Profit Percentage

0,0330123

-0,199421

0,037637

Operating Profit Percentage = Operating profit / Total sales

 

According to the data provided in Table 4, the General Motors’ ratios of profitability have impaired in 2013 as compared to 2011 year. For example, the company’s return on total assets reduced from 6.2% in 2011 to 4.4% in 2012 and 3% in 2013. “A higher ROA generally means greater efficiency, because you’re earning more money on less investment” (Levinstein, 2014, p. B-48).

In addition, the company’s return on equity reduced from 24% in 2011 to 17% in 2012 and 12.5% in 2013. “Return on equity is computed by dividing after-tax net income by average equity from the balance sheet” (“Understanding Financial Ratios”, 2014, p.63).

For this reason, the company’s effectiveness and profitability are impairing. It should be also noted that all considered profitability ratios have worsened in 2013 as compared to the previous two years. Only operating profit percentage and gross profit percentage returned on their previous positions after a significant falling in 2012. It is also noteworthy that the worst situation was observed in 2012, since two from the considered indicators were negative.

Recommendations

After all, some recommendations that might improve the performance and financial position of the company should be considered. The General Motors’ effectiveness and profitability are low due to low values of the ratios during the past three years. However, the company is able to improve its profitability by increasing investments in the marketing activities in order to attract more potential customers. In addition, the firm tries to provide only high-quality services for its customers. However, the General Motors should remove barriers for clients in order to stimulate total sales. That is why the company’s managers should find other potential markets to improve its financial position.

The company’s capital structure may be improved by lowering the share of liabilities in the structure of total assets. The firm’s efficiency may be refined by increasing the company’s total sales and selling its excess current assets.

Conclusion

Summarizing the current paper, it is important to emphasize that the company is recovering after the 2009 bankruptcy, but the rates of this recovering are not enough.  The firm’s profitability ratios have impaired, but they are positive. The General Motors’ liquidity is high and the company does not have problems with it. The firm’s efficiency ratios showed discordant dynamics, but they have not changed a lot. Only debtors’ payment period significantly rose from 33 days in 2011 to 77 days in 2013. It means that the company’s situation with its doubtful clients has impaired. The entire range of solvency ratios was a little bit improved in 2013 as compared to 2011. That is why the company is recovering after the bankruptcy, but the rates of this recovering are not enough.