The question of how General Motors (NYSE:GM) funded its balance sheet can be explored by looking at the company’s capital structure.
The capital structure relates to how a company leverages by using debt and equity. In this aspect, GM can leverage by having more debt to equity or the other way around. On the other hand, the company can also choose to have a balanced debt structure such as an equally funded balance sheet between debt and equity.
In this article, we will look at GM’s capital structure to find out how the company funded its balance sheets, whether by debt or by equity or both.
That said, there a few ratios that we can use to analyze GM’s debt structure. The debt to equity ratio and debt to asset ratio are exactly what we need to analyze GM’s balance sheets.
Let’s get started!
Types of Debts
The debt to equity ratio can be derived by using the equation below:
Debt to equity ratio = Debt / Equity
From the equation, the equity portion can be easily extracted from GM’s balance sheets. In this case, I used the company’s total equity in which the stockholders’ equity as well as the non-controlling interests portions are included.
For the debt portion, it’s a little bit tricky because there are many types of debts such as interest bearing and non-interest bearing debts. Besides, there are also current and long-term debt as well as other types of liabilities such as pensions, post-retirement benefits, etc.
For simplicity, I have considered only the following types of debts when calculating the debt to equity and the debt to asset ratio.
1. Total debt – General Motors’ total debt consists of only interest bearing debt that comes from the automotive and GM Financial segments. In this context, GM’s total debt includes both the current and long-term debt instruments such as bonds, leases and credit revolvers.
2. Long-term liabilities – GM’s long-term liabilities consists of interest bearing as well as non-interest bearing liabilities. Interest bearing liabilities are long-term borrowings such as those that come from bonds and credit revolvers that take more than a year to pay back. On the other hand, non-interest bearing liabilities are post-retirement benefits and pensions as well as other liabilities stated in the company’s balance sheets.
3. Total liabilities – GM’s total liabilities include both current and long-term liabilities and are the aggregate debt and financial obligations owed by the company. They are accounts payable, accrued liabilities, borrowings, pensions, post-retirement benefits, etc.
The subsequent debt to equity ratio and debt to asset ratio discussion will be based on the 3 types of “debts” definitions above.
GM’s Total Debt to Equity Ratio
The chart above shows General Motors’ total debt to equity ratio from 2015 to 2020.
Based on the prior debt definition, total debt refers to all of GM’s interest bearing debt such as bonds, leases and credit revolvers that come from the current as well as long-term portions.
According to the chart, GM’s total debt to equity ratio has been rising steadily for the past 5 years and reached nearly 3.0 as of 1Q 2020.
The Q1 2020 debt to equity ratio of 2.85 was one of the highest figures ever recorded since 2015 for the company.
At a ratio of nearly 3.0, GM’s leverage was $3 dollar of debt to $1 dollar of equity.
From a comparison perspective, GM’s debt leverage with respect to equity was nearly 2X higher than that of Tesla. You can find out more about Tesla’s debt to equity ratio here: Tesla’s debt leverage.
GM’s Long-term Liabilities to Equity Ratio
In terms of long-term liabilities to equity ratio, GM’s result has been nearly flat in the last 5 years from 2015 to 2020.
However, the long-term liabilities to equity ratio has been on a rise in the past few quarters, increasing from its low of 2.0 in Q3 2019 to as high as 2.5 in Q1 2020.
GM’s long-term liabilities were mostly made up of long-term debt such as bonds, leases and credit revolvers. The steady rise of the ratio in the past few quarters implies the company’s increasing leverage in terms of long-term debt and borrowings.
GM’s Total Liabilities to Equity Ratio
For total liabilities, the respective leverage ratio has also been flat for the last 5 years from 2015 to 2020, hovering between 4.0 and 5.0.
As seen from the chart above, GM’s total liabilities have been around 4X to 5X higher than that of equity between 2015 and 2020, with 1Q 2018 having the highest ratio at around 5.0.
As of 1Q 2020, GM’s total liabilities to equity ratio was around 4.60, illustrating that GM’s total leverage with respect to equity was slightly off its new high.
However, the ratio has slowly increased since touching the lowest level at 4.0 in 3Q19. The rising ratio indicates GM’s increasing leverages intereswith respect to equity.
GM’s Total Debt to Asset Ratio
When we measure General Motors’ total debt leverage against total assets, the chart above shows that the leverage ratio has been rising steadily over the last 5 years.
As shown in the current chart, GM’s total debt to asset ratio was at an all-time high of slightly above 50% as of 1Q 2020.
The result was nearly a 70% growth in terms of debt leverage against total assets when compared to the 30% ratio which was reported back in 1Q 2015.
The increasing trend illustrates GM’s expanding debt leverage, both current and long-term portions, with respect to the company’s total assets over the years.
With more than 50% of GM’s total asset being funded by debt, the result suggests that as much as half of GM’s capital structure was made up of interest bearing borrowings such as bonds, leases and credit facilities.
In other words, for every $1 dollar of asset, $0.50 dollar of that was acquired through debt.
GM’s Total Liabilities to Asset Ratio
The total asset can also be referred to as total fund. It represents the aggregate asset owned by the company. It includes everything from properties, plants, equipment to inventory as well as cash and cash equivalents.
This said, the total liabilities to asset ratio in the chart above shows the percentage of GM’s balance sheet being funded by liabilities.
Based on the chart, as much as 80% of GM’s debt structure was made up of liabilities. In other words, GM funded as much as 80% of its balance sheet with liabilities.
One notable trend in the chart is that the company’s capital structure has not changed much and has remained at around 80% over the past 5 years between 2015 and 2020.
At this ratio, GM’s total asset or total fund was 80% liabilities, and the rest being equity.
GM’s result is comparable to that of Tesla in which close to 80% of Tesla’s balance sheet was being funded by liabilities.
The answer to the question of how GM funded its balance sheet can be found in the debt to equity as well as the debt to total asset ratio.
In this aspect, GM’s leverage of debt to equity was close to 3.0 as of 1Q20 whereas the leverage of total liabilities to equity was 4.80 during the same quarter, indicating that GM has about $3 dollar of debt and $4.80 dollar of liabilities to $1 dollar of equity.
Comparing the result with that of Tesla, GM’s total debt leverage was 2X higher than Tesla’s leverage with respect to equity.
On the funding side, GM’s capital structure has been around 80% liabilities and only 20% equity from 2015 to 2020, illustrating that the company has funded its assets acquisition with mostly debt.
Moreover, the total debt to asset ratio indicates that GM’s total debt leverage, both current and long-term portions, was the highest in 1Q 2020, and reached slightly above 50% in the same quarter.
References and Credits
1. All numbers in the charts in this article were obtained and referenced from quarterly and annual filings available in General Motors’ SEC Filings.
2. Featured images in this article are used under creative commons license and sourced from the following websites: Truck Hardware
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