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GM financial overview

GM financial overview The General Motors Corporation is a multifaceted company but its primary function is the manufacturing of automobiles and light trucks (SIC 3711). The General Motors stock is listed on the New York Stock Exchange and has approximately 1,426,592,046 outstanding shares on the marketplace, as of 10/14/2001. It is headquartered in Detroit Michigan with offices around the world. General Motors has many other operations besides automobile manufacturing including: General Motors Acceptance Corporation Financial Services, Hughes Electronics Corporation, and the GM Locomotive Group. (Disclosure.com) Overall, General Motors has had five profitable years with increasing sales during the same period. GM has also paid a fixed dividend to its shareholders over the same period. The one-year, which was below average for GM, was 1998. During this period, GM was restructuring its top management and operations and also incurred a union strike of 54 days. However, GM did return to better performance in 1999 and 2000. GM overall was able to attain a fixed dividend of $2.00 per share and increase the shareholders value over the past five years. The first observation from the financial data in appendix one is that General Motors has a low profit margin and is generally less than the industry average each year. The firm is able to keep a low profit margin because they have such high sales volumes throughout the world. This strategy can be both an asset and liability in business planning. The plus side of the strategy is that GM is able to sell a large number of vehicles in the marketplace due to the lower selling price as compared to the competitor. However, the down side of the strategy is that there is a possibility that if sales volumes decrease, the firm can incur a significant decline in the EPS because the profit margin on each item sold is very low. If the global economy sours, GM can have a very difficult time meeting shareholder expectations. Another observation is that GM looks to use more debt financing that equity financing for funding their activities. The debt to equity ratio has steadily decreased over the past five years and is higher that the industry average. Also, the current and quick ratios are much lower than the industry averages. This again can pose some problems for the firm. The disadvantages of this leveraging strategy is that GM’s interest expense will increase, the firm can be exposed to interest rate risk, and the possibility that GM would not be able to meet its obligations during poor economic conditions. The advantages of debt financing are that: bond investors are generally willing to accept a lower rate of return as compared to equity investors, the debt interest is tax deductible, and bond investors do not have voting rights on company issues. (Anthony 243) General Motors’ times interest earned ratio has generally stayed on course except for 1998. This shows that GM needs strong sales volumes to pay its on its liabilities due to the low profit margin. If a long-term decline in worldwide auto sales occurs, GM may have difficulty paying on its debt. In February 1998, GM announced a four billion dollar stock buyback program to decrease the number of outstanding shares and lower the amount of dividend payments. This corporate action was completed in December 1999 and they used over 2.6 billion dollars in cash to finalize the program in 1999.(GM 1999 77) This action shows that GM is committed to primarily issuing new debt to finance any capital needs. The one benefit of this action is the amount of dividends that GM will have to pay out to the current shareholders. In 1998, GM had to pay out 47% of its earnings to keep its fixed dividend policy of $2.00 for the year. When companies are paying out that much of earnings that can have a negative effect on product development and corporate expansion in the years to come. Another benefit of debt financing is a higher return on equity ratio. GM has outperformed the industry in the last five years for the ROE because it uses more debt financing and less equity. However, the ROI is very low compared to the ROE because of the increased long-term debt that the firm has used for financing activities. The return on investment ratio is showing that the bond investors are financing more of the assets of the company as compared to the equity investors. GM has just instituted a new corporate policy in 1998 to keep the return on net assets at a minimum of 12.5%. (GM 1999 11) This program will help senior management to measure the returns of the assets that the firm has. It will also allow management to evaluate whether or not to purchase and finance new capital expenditures based upon the expected rate of return. In the transnational framework, GM would be classified as an international company because it manages its international operations as a financial investment. This is an advantage for GM because they are able to gain access to lower cost labor, new market opportunities and access to partnerships and alliances with automakers in many different countries.(Bartlett 11) This positioning will allow GM to reap the benefits of a global scale of economies and possibly lower unit production costs in the future. GM currently has alliances with Subaru, Suzuki, Isuzu, and Saab. The inventory ratios have moved in a positive direction over the past two years. This a great benefit for a firm, which has a very low profit margin because it is showing that management is properly handling both the purchasing and work in progress inventories effectively. Management should continue to monitor the inventory levels of the firm and make any changes to the purchases based upon the demand for new automobiles. Also, a large inventory increases the fixed costs of the firm due to the increased warehouse space, personnel, and utility costs that are associated with storing merchandise. The General Motors Corporation has used debt financing rather than new stock issuances for the financing of the organization. GM also has a low return on sales and needs to have a high sales volume to ensure that it is able to meet its interest payments on that debt. The firm has been able to keep a very high return on equity because it does not have a great deal of outstanding equity. General Motors is also efficiently utilizing its inventory because of the performance of the inventory turnover and days of inventory ratios. General Motors have improved their financial position over the last two years after a dip in 1998 and look poised to continue the strong results into the future. GM has increased sales over the past three years and has held its profit margin over the past two years. However, global and US market share has been decreasing over the past five years to 15% and 27% respectively, in 2000. President Rick Wagoner has introduced four key initives in 2000, which GM hopes to improve upon. They are: act as one company, embrace stretch targets, move with a sense of urgency, and enhance our product and customer focus.(GM 2000 4) Hopefully, General Motors will be able to improve upon its financial success with the introduction of these key actions. Bibliography: Bibliography Anthony, Robert N., Hawkins, David F., Merchant, Kenneth A. (1999) Accounting: Text and Cases. (page 243). New York, NY: Irwin/McGraw-Hill. Bartlett, Christopher A., Ghoshal Sumantra. (1998) Text, Cases, Readings in Cross-Border Management (pp. 11 - 17). New York, NY: Irwin McGraw-Hill. Dun & Bradstreet. Industry Norms and Key Business Ratios. 1999 edt. (2000) (page 252). Murray Hill, NJ: Dun & Bradstreet. Dun & Bradstreet. Industry Norms and Key Business Ratios. 1998 edt. (1999) (page 271). Murray Hill, NJ: Dun & Bradstreet. Dun & Bradstreet. Industry Norms and Key Business Ratios. 1997 edt. (1998) (page 302). Murray Hill, NJ: Dun & Bradstreet. Dun & Bradstreet. Industry Norms and Key Business Ratios. 1996 edt. (1997) (page 320). Murray Hill, NJ: Dun & Bradstreet. Dun & Bradstreet. Industry Norms and Key Business Ratios. 1995 edt. (1996) (page 327). Murray Hill, NJ: Dun & Bradstreet. General Motors Corp. (2001, October 14). Retrieved on October 20, 2001 from www.disclosure.com. General Motors Corporation 1998 Annual Report. (1998). (pp. 55 – 83). General Motors Corporation 1999 Annual Report. (1999). (pp. 53 - 93). General Motors Corporation 2000 Annual Report. (2000). (pp. 41- 79). Standard & Poor’s. General Motors (GM). (1999) Standard Corporation Descriptions. (pp. 6000 – 6003) New York, NY: McGraw-Hill. Troy, PhD., Leo. Almanac of Business and Industrial Financial Ratios. 32nd edt. (2001) (page 159) Paramus, NJ: Prentice Hall. Troy, PhD., Leo. Almanac of Business and Industrial Financial Ratios. 31st edt. (2000) (page 159) Paramus, NJ: Prentice Hall. Troy, PhD., Leo. Almanac of Business and Industrial Financial Ratios. 30th edt. (1999) (page 159) Paramus, NJ: Prentice Hall. Troy, PhD., Leo. Almanac of Business and Industrial Financial Ratios. 29th edt. (1998) (page 159) Paramus, NJ: Prentice Hall.

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