A Review of the Financial Reports of General Motors – 2011 & 2012
General Motors Company is an
American Multinational Corporation which is headquartered in Detroit , Michigan United
States
General Motors currently
produce 10 brands:
Ø Chevrolet
Ø Buick
Ø Cadillac
Ø Opel
Ø Holden
Ø Vauxhall
Ø Wuling
Ø Baojun
Ø Jie Fang
Ø Uzdaewoo
I
The benefits of ratio
analysis of balance sheets over a period of time is that it guides us in
assessing the financial management of the asset and liabilities in terms of:
Ø
Financial
Strength
Ø
Financial
Weakness
Ø
Efficiency of
the Use of Assets
Ø
Liquidity of
Short Term and Long Term Assets.
The Gross
Margin
for 2012 stands at 7.89% compared to 2011 where GM earned a gross margin of
13.24%. GM has therefore seen a decrease of almost 5.5% year on year. This
decline is largely attributable to an increased cost base in the current year
(given that revenue has actually increased year on year) which has driven down
the gross profit. However, this decrease is not unexpected.
The Operating Profit % and the Profit
before Interest and tax (PBIT) for 2012 show a drastic 23.74% decrease
in PBIT on the previous year. The loss seen here is a combination of the increased
cost of sales (as noted above) as well as increases in general operating costs
including large surge in goodwill impairment charges in the current year (a
2011% increase)
The Profit before Tax for follows
the same pattern of the operating profit and the PBIT which is a dramatic
decrease of -19.84 % for 2012 in comparison to the profit before tax ratio of
3.98% in 2011. The Profit before tax is a profit measure that allows for net
financing costs. As this is in a negative position for GM in 2012,
this is not indicative of a healthy financial position.
The Profit after Tax Ratio is available
after the allowances for the financing costs and corporation tax obligatory
costs. Profit after tax is also known as the return on sales. The ratio
indicates the profit available for distribution to shareholders by dividends or
future re investment. The profit after tax for 2012 was at 4.03% in comparison
to 6.18 % for 2012. While this is a decrease in GM profit after tax ratio it is
still a relatively satisfactory return. The figure is completely distorted
because as we can see in the previous ratios GM were made a huge loss on their
operating profit and PBIT in 2012 however they have been cushioned by this tax
allowance. The above section from their annual report what occurred in the
balance sheet and financial report in order to give GM a positive figure of
4.03%.This deferred Tax valuation and Goodwill impairment completely changes GM
profit after Tax ratio and their return on equity figures for 2012 and presents
a false reality to potential investors of continuous profits and stronger
company performance then there actually is. Despite this, a PAT figure of 4.03%
is still considered as relatively strong PAT. While it is still a decrease on
2011’s figure it is still an acceptable return to potential investors with a
long-term view as to GM’s future prospects.
The Return on Capital Employed ratio compares income with the net
operational assets used to generate that income. In 2012 the ROCE had a huge
decrease to -31.82% in comparison to 2011 where the ROCE ratio was 6.19%. This
is a very negative result for the shareholders and investors compared to the
progress that was made with 2011 figure. This figure is largely a product of
the continual restructuring that has occurred in the company due to the
bankruptcy.
The Return on Equity (ROE) In 2012, the ratio was 16.58% which
was a decrease of 7.24% from 2011 when the ratio was 23.82%.The 2012 ROE figure
similar to the 2012 profit after Tax figure is extremely distorted due to the
deferred tax evaluation and goodwill impairment. While the figure of 16.58% is
a satisfactory ROE to shareholders, the figure has still decreased by over 7%
from the 2011 comparative. The decrease in this figure may be due to the
company attacking various issues like their considerable pension obligations
and European losses which would have lead to increasing costs associated with
the company for 2012 but may help the company in the long run.
“We reduced our U.S. salaried pension obligations by $28 billion. By
offering retirees a lump sum buy-out or an insurance company-backed annuity, we
were able to reduce a form of leverage, reduce claims on our future cash flow.”
Capital Turnover expresses the number of times that
capital is turned over in the year; the ratio was 1.60 in 2012 compared to 1.64
in 2011.
The Profitability outlook
for GM is quite positive considering they were in Bankruptcy in 2009. Many of
the negative figures are primarily due to larger losses in the European market
then they originally expected. GM’s results for North America were very similar
to their 2011 figures; In the US GM sold 2.6
million vehicles, up 4 percent compared with 2011, although market share
declined 1.6 points to 17.5 percent. The share decline is due in large part to
the recovery of the Japanese automakers after the Fukushima earthquake and
tsunami, and the relative age of GM’s product portfolio.
The Current Ratio shows that in
2012 the ratio was at 1.30 in comparison to the 2011 ratio of 1.22, See
Appendices 2 for Annual Report Figures. The current ratio measures the
liquidity of the business, notably different industries will have different
liquidity ratios depending on the business. While there has been a slight
increase in Current Liabilities from 2011 to 2012, the sizeable increase in current
assets has ensured that there has been a positive trend in this liquidity ratio
year on year. GM is moving closer towards the ideal state of 2:1 which can only
be considered positive to both current and potential investors, lenders and
indeed any users of these financial statements.
The Acid test Ratio or Quick Ratio indicates
the ability of the company to pay its trade payables out of its trade
receivables in the short term . There is a slight increase of inventories from 2011
to 2012 by the difference of $390,000,000 or 2.72% (Note 8 A. The
ratio for 2012 is (1.02:1) in comparison to 2011 where this ratio (0.95:1).
This is a positive movement year on year and is indicative that GM has
sufficient resources to pay its short term payables (i.e. those < 1 year).
The Debtor
Days
from 2011 to 2012 is up by slightly by 0.7% this would have little effect on
the business. Arguably it has taken the same period of time to receive payment
from customers.
The Creditor
Days
from 2011 to 2012 has decreased by 3 days, suggesting that suppliers have
decreased the credit terms with GM. Although this is a decrease in credit terms
the fact that GM has such strong credit terms allows them a free source of
finance as there is a difference of payment between debtors and creditors of 40
days.
Stock Days sees an increase from 40 days in 2011 to 38 days
in 2012 this is an indicator of the recent rate of usage.
The Operating
Cycle days: This measurement highlights the level of working capital
needed (Stock + Debtors – Creditors) to finance current level of sales. The
Percentage ratio of the operating cycle in 2012 has increased slightly to
-0.17% compared to the percentage rate of -0.18% in 2011. In the motor industry in general the
financial strategy is to have minimum level of stock of vehicles and minimum
credit to car dealers, whilst extending maximum credit from components
suppliers.
The Asset
Turnover measures the performance of the company in generating sales
revenue from the assets under its control. GM measures in 2012 is 1.02, in 2011
the figure was 1.01. There is a miniscule
increase the figure since last year this figure shows that the assets are being
utilised more effectively within the company. There has been an increase in net
sales by $1,980m but there is an increase in total assets of $5,073m.this
figure is likely to improve in future years as the company increase’s market
share in emerging markets like china and increases efficiency.
In 2012 the current
Debt/Equity Ratio stands at as a percentage 157.94% compared to 2011 of
134.48%. Market conditions and Management decisions will impact on this ratio.
The extent to which the debt / equity is high or low geared has an effect on
the earnings per share of the company, if profits are increasing, then higher
gearing is preferable, if profits are decreasing, then lower gearing or no
gearing is preferred .GM’s gross profit, operating profit and profit before tax
for 2012 are lower than the quoted 2011 figures. These figures are quite high
for both 2011 & 2012. These figures will be of some concern to the company
as there is more debt in the company then equity for 2012 by a figure of
$21,430m.From our analysis of the balance sheet the two biggest figures on the
debt side of the balance sheet are post-retirement
benefits and pensions this is the case for both 2012 and 2011. This is GM
trying to address their pension obligations which in turn leads to a large
increase in the Debt figure. This trend will probably continue for a few years
until the pension issue has been fully resolved.
The Interest Cover for
2012 stands at -62.09times in comparison to the 2011 figure of 10.47 times.
This shows that GM can repay its loans. There is
no true interest cover in 2012 due to the lack of true profitability (cash flow
profitability).
Stock Market Ratios
The Earnings
per Share for GM is $3.10 and
the Diluted Earnings per Share of $2.92 with the figures for 2011 are Basic EPS $4.94 and $4.52 diluted.
The Dividend
per Share for 2012 is 0 as the board has determined not to
recommend a dividend this year. This is follows the same pattern as 2011. From
a shareholders perspective it is concerning not to have received dividends in
the last two years. The shareholders can make returns of the possible price
fluctuations of the shares in the stock market.
The Dividend
Cover
this measures the number of times the profit attributable to equity
shareholders covers the dividends payable. The 2012 and 2011 figure shows 0
times for GM.
The Dividend
Yield percentage for 2013 is 0% compared to 2011 which shows a
yield of 0%.
The Price
Earnings Ratio for 2012 is 9.22 which is an increase on the
ratio 4.07 of 2011.
3.1 Key Financial Information for Year 2013
General
Motors generated some optimistic and positive results in 2013 and the company
is steadily resolving its problems occurred in 2009. Figures released indicate
that General Motors is enduring a rise in sales within the U.S and in China.
General Motors success in these countries is reinforced by the company’s unit
sales rising by 4 percent in 2013 to 9.7 million vehicles. 62% of these
vehicles were sold within China and the United States. General Motors approval
for the development of a $1.3 billion manufacturing facility allowed them the
possibility to create 150,000 Cadillacs per year in China and further expand
their dominance as a luxury car supplier within the Chinese market.
Reasons for
this upturn in profits within these regions can be determined through the new
Cadillac and Chevrolet models introduced last year, which have clearly been
approved by the Chinese and the U.S. General Motors also sold 3.2 million
vehicles in China last year which was an 11% increase in comparison to the
figures generated in their 4th quarter in 2012. “GM’s global production appears
to have tracked modestly stronger than expected in 4Q” stated from JP Morgan by
autos analysts Ryan Brinkman, Samik Chatterjee and David Karnovsky.
A cause for
concern is General Motors current trend of operating at a loss within the
regions of Europe. However there was reason for some optimism within 2013 due
to the operating loses being calculated as $1.2 billion, which was lower than
the $2 billion which was expected during the year. The company also has
installed plans to create new car models which should be available to consumers
in 2015 and ranging in automobiles such as Chevrolet, GMC and Cadillac and act
as an appealing project in regards to consumers opinions.
Revenue has
continued to increase by General Motors in recent years and figures have shown
that their revenue in 2013 has increase by 2% to $155.4 billion, in comparison
with $152.83 billion achieved in 2012.
The
company's earnings before interest and tax have also increased in year ending
2013 to $8.6 billion in comparison to $7.9 billion in the previous year.
However their earning per share has decreased 22.69% to $2.38, while there was a
drop in net income in 2013 with the figure now standing at $3.8 billion.
“Special Items” that occurred during the year impacted on net income and lead
to a decrease. This translated to an unfavourable impact to common
stockholders. This can be shown through the figures of $1.3 billion ($0.80 per share),
compared to $0.5 billion ($0.32 per share) impact in 2012. It was stated that
“These
special items included charges for several strategic decisions taken to improve
the company's future competitiveness in key global markets”.
Examples of
the “special” items which were developed throughout 2013 included the $0.7
billion expense created through the exit of the company's Chevrolet brand from
the European region. There was a $0.5 billion asset impairment caused by the
discontinuation of manufacturing within Australia.
Pension Obligations and Current Situation
General
Motors is presently undergoing a pension obligation of $71 billion owed to the
pension funds of United Auto Workers. This is a major problem surrounding the
company due to the fact that the money owed currently outweighs the value of
General Motors itself and would is a negative factor which will repel potential
investors in the company.
However in
2013, General Motors performed well in handling this situation and higher
interest rates and positive investment results has meant the pension plans have
improved during this year. In 2013 Vice Chairman of General Motors, Steve
Girsky state that the pension funds was so difficult that it “would
probably have to occur around bargaining” with the union of the UAW.
General Motors to an extent operated on this statement and offered the eligible
salaries retirees a lump sum payment in 2012. 30 percent of the 44,000 eligible
individuals accepted this offer meaning roughly $3.6 billion was paid out in
these buyouts during the year.
Outline
of Pension Plan
|
Eligibility
|
Actions/Options
|
|
Retired from GM on or after Oct. 1, 1997 and before
Dec. 1, 2011.
|
Three choices:
1.
One-time, single lump-sum payment.
2.
Continue with current monthly
benefit, payable by Prudential.
3.
New form of monthly benefit (based
on marital status) – single life annuity or joint and survivor monthly
benefit, payable by Prudential.
|
|
Retired from GM before Oct. 1, 1997.
|
Continue with current monthly benefit, payable by
Prudential.
|
|
Most active salaried employees and retirees who started
receiving their pension benefits on or after Dec. 1, 2011.
|
Moved into new GM pension plan with same benefits.
Lump-sum payment or monthly pension benefit available at retirement, payable
by GM.
|
General
Motors year end global pension obligations stood at $99 billion and were
approximately 80 percent funded by the end of 2013. The year-end unfunded
figure stood at $19.9 billion, which was contrasting to $27.8 billion in year
ending 2012. These actions contributed to the pension funds project being
underfunded by $14 billion, $82.1 billion in liabilities and $68.1 in assets,
giving a ratio of 83%. The pension fund continues to grow in year ending 2013. The
Plan was underfunded by $7.3 billion, $71.5 billion in liabilities and $64.2
billion in assets, giving a positive ratio of 90%.
The current
economic climate has inclined General Motors to recently release a statement
declaring that they currently entirely do not expect mandatory contributions to
the U.S defined benefit pension plan. They also state that no voluntary cash
contributions will be accepted in any regard and this will be reviewed over the
coming year.
At the
present time General Motors major focus is on other operations will the company
and UAW and General Motors have put pension plans on hold until 2015 until the
company has stabilized to a reasonable level. Chuck Stephens, General Motors
executive vice president recently stated:
“In 2013, we
strengthened our fortress balance sheet and delivered consistent earnings,
providing the foundation for a quarterly dividend for our shareholders this
year. This year we’ll leverage our strength in the U.S. and China to execute
important restructuring activities in other key global operations.”
Recent
Lawsuit
A current
major issue preventing the company from its steady recovery is the current
“wrongful death” lawsuit General Motors is currently enduring. The case
revolves around three teenage girls who were severely injured or killed in
2006, while driving a Chevy Cobalt, a car produced under General Motors.
The issue
involves the recent recall of over 1.6 million vehicles in 2014. This was due
to ignition switch problems within certain vehicles produced in 2001. General
Motors is being sued due to the recall of the automobiles in 2014, despite the
fact that they were aware of the problems to the car in 2001. In 2005 the
company released suggested remedies to the ignition problem but did not install
a recall to car owners and has apologized in regards to how the situation was
handled. General Motors is being accused of having full knowledge of the cars
defects for nearly a decade but not taking the required steps to recall the
cars and ensuring that the drivers would be safe.
Robert
Hillard is a lawyer for the families involved and stated that: "General
Motors hid this dangerous, life-threatening defect from my clients and all
other Cobalt drivers for over a decade just to avoid the cost of a recall.
General Motors is guilty of betraying our trust." Hillard is proposing a
$50,000 compensation package for each family.
It was
identified that the reason for the incident - which killed Amy Rademaker, 15,
Natasha Weigel, 18, and also Megan Phillips,18, to sustain severe injuries to her
body - was due to the ignition fault,
which caused the steering to lock and the driver to lose control of the car.
General
Motors share price has received a decrease in value due to the affairs and
several other lawsuits are potential being faced by the company due to the
recall. The company is facing being sued by an investor due to the rapid
decrease in the share prices. Currently General Motors has informed the public
that it received reports of 12 deaths and 34 crashes in the recalled cars. The recall
has initiated investigations by federal prosecutors and regulators, and General
Motors has acted by opening its own internal investigation. Congress also has
decided to install plans to hold hearings over the debate.
General Motors is currently
facing a $7,000 a day fine from the National Highway Traffic Safety
Administration, due to its non-compliance with the answering of abundance of
over 100 questions regarding the situation. General Motors on the 4th of April
2014 provided the NHTSA with a 200,000 page document in which they answered the
questions issued but were deemed by the agency as not meeting their
requirements. They will therefore face a $7,000 a day fine until the questions
are answered and complied with in an acceptable manner.
4.0 Key Results to be monitored
The Main results that should be monitored to
ensure that GMs future is secured are as follows:
Ø Gross margin
Ø Net margin
Ø The
debt/equity ratio
Ø Gross margin: The key result of GM’s gross margin should be monitored for the reason
that
Gross margin simply reflects the profit that GM makes on each car sale.
While their sales of 2012 increased there was also a significant rise in costs
that reduced GM’s Gross margin. An increase in GM’s Gross margin can reflect a
lot of different combinations for example it may reflect the premium price
customers pay for the car such as Chevrolets increase sales outside the US or it may reflect the company’s ability to
produce vehicles efficiently. By monitoring GM gross margins performance we can
compare it to other competitors in the industry. From this analysis we can
compare do GM have a healthy gross margin relative to our competitors. If the
margin much lower than other car companies this would be worrying for the
future security of GM.
Ø Net margin: should be
monitored as it shows the True Profitability of a company. Profitability is the
essence of survival for any company. The degree of profitability achieved by GM
will have an Impact on the company’s share price (which is low due to the risk
associated with emerging form bankruptcy). GM’s ability to attract future
investors and to finance the company’s future growth is all dependent on its
ability to achieve a significant level of profitability. Net margin also
reflects the company’s ability to pay dividends and to service and reduce its
levels of debt.
Ø The
debt/equity ratio:
The last result that
should be monitored is the Debt/ Equity ratio. The Debt ratio should be
monitored as provides an insight in to the gearing of the company. As GM has
just emerged from bankruptcy and is only recently returned to profitability its
Debt ratios are quite high.
A high debt level can
inhibit a company’s ability to:
Ø
Attract new
investors.
Ø
Service the company’s interest payments and
reduce the debt
Ø
Pay dividends to the shareholders
Ø
Fund future growth and expansion of the
business.
These are the key results that should be monitored in going forward to
make sure the future of GM is secure and that GM continues to maintain the
progress it has made since emerging from bankruptcy in June 2009.
5.0 Conclusion
After undertaking this
brief analysis of GM’s 2012 Annual report, The Company had its third successful
year of profitability since emerging from bankruptcy. While this is an extremely positive trend,
GM’s profit after tax figures for 2012 and ROE were quite distorted due to Tax
deferrals and goodwill impairment. This figure mask’s the fact that GM was not
truly profitable in 2012 in areas as operating profit, PBT and PBIT. GM has
improved in areas of solvency since 2011but the financial structure of the
business has considerably weakened relative to 2011. The EPS has also dropped
considerably on the previous year. While these figures will raise some concern
the fact that GM has had its third successful year of profitability and
maintaining its market holding is to be commended. The trends of successive
years of profitability could lead to further investment (more equity) and a
reduction in the amount of debt in the company.
The additional
information gathered in regards to performances throughout the 2013 period also
shows great signs of re growth and a positive figures appearing in their end of
year reports. The fact that General Motors is currently undergoing such success
during a continuously difficult economic period is hugely impressive and shows
signs the company has learned from its mistakes which caused their bankruptcy
and has now implement the logistics and correct financial management to be able
to cope with this type of pressures.
The current Lawsuit
filed against General Motors will continue to test the company as a whole and
will be interesting to follow how the corporation will deal with these
accusations, while maintaining their steady growth and recovery from
bankruptcy.
