How Does GM Fund Its Balance Sheet?

How does General Motors (NYSE:GM) fund its balance sheet?

This question can be answered by looking at GM’s debt or capital structure.

The capital structure relates to how GM leverages through debt and equity.

To further illustrate, GM can leverage by having more debt to equity or the other way around.

On the other hand, the company can 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 entirely by debt or by equity or equally both.

That said, there are a few ratios that can be used to analyze GM’s debt or capital structure.

The debt to equity ratio and debt to asset ratio are the exact ratios that we need in order to analyze GM’s balance sheets.

Let’s go take a look!

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 equity are combined.

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, the following paragraphs lay out several types of debt definitions for your reference:

1. Total Debt – General Motors’ total debt consists of only interest-bearing debt, including those from the automotive and GM Financial business segments.

In this context, GM’s total debt includes only current and long-term debt instruments such as company-issued bonds, leases and credit revolvers that bear interest charges.

2. Net Debt – GM’s net debt includes only automotive debt and GM Financial’s unsecured debt and less total cash position.

In short, GM’s net debt is mainly interest-bearing debt instruments.

For a complete definition of net debt, please visit this article – GM’s net debt.

3. Long-Term Liabilities – GM’s long-term liabilities consist of long-term interest-bearing as well as long-term non-interest-bearing liabilities.

Long-term interest-bearing liabilities include bonds, credit revolvers and other debt instruments that take more than a year to pay back.

On the other hand, non-interest-bearing liabilities include post-retirement benefits and pensions as well as other liabilities stated in the company’s balance sheets.

4. Total Liabilities – GM’s total liabilities are all liabilities, both current and long-term portions, owed by the company to 3rd parties.

These include all debt and financial obligations owed by the company such as accounts payable, accrued liabilities, borrowings, pensions, post-retirement benefits, etc.

GM’s Total Debt To Equity Ratio

GM total debt to equity ratio

Let’s first look at GM’s debt leverage through the debt to equity ratio for the period from fiscal 2015 to 2021.

According to the chart, GM’s total debt to equity ratio has been rising steadily for the past 5 years and reached nearly 3.0X in fiscal 2020, the highest figure that GM has ever reported.

However, in subsequent quarters, the ratio has declined and reached 1.8X as of fiscal 3Q 2021, indicating that GM’s debt leverage has significantly declined from its peak.

At a ratio of about 1.8X, GM’s debt leverage was roughly $1.80 dollar of debt to $1.00 dollar of equity.

Historically, this figure is considered slightly on the high side as GM’s debt leverage was much lower at only 1.5X in fiscal 2016.

When compared with the figures from Tesla, GM’s debt leverage with respect to equity was nearly 2X higher than that of Tesla.

Breakdown Of GM’s Tota Debt To Equity Ratio

Breakdown of GM total debt to equity ratio

GM’s total debt can be broken down into automotive and GM Financial portions as seen in the chart above.

According to the chart, GM Financial definitely has higher debt leverage compared to GM’s automotive.

Since fiscal 2015, GM Financial’s debt to equity ratio had been on a rise and topped out at nearly 2.50X.

In subsequent quarters, GM Financial’s ratio steadily declined and reached only 1.50X as of fiscal Q3 2021, suggesting the declining debt leverage of the subsidiary.

In contrast, GM automotive’s debt over equity ratio has been flat at about 0.30X since fiscal 2015, indicating the steady leverage of this subsidiary.

As of fiscal 3Q 2021, GM automotive’s ratio came in at about 0.30X which is roughly in line with the historical average.

In short, GM automotive’s debt leverage is much lower compared to that of GM Financial.

GM’s Net Debt To Equity Ratio

GM net debt to equity ratio

While GM Financial is highly leveraged compared to GM automotive, this may not be totally realistic.

The reason is that GM Financial is the captive finance arm of the company.

As a result, a big part of its debt comes from lending and is secured by collateral.

To see what truly counts, we look at the net debt.

As mentioned, GM’s net debt includes only the automotive portion and GM Financial’s unsecured debt and then less the total cash balance.

Therefore, GM’s net debt reflects a more realistic nature of the company’s leverage position.

According to the chart, GM’s net debt leverage grew significantly in the early years but has remained constant since fiscal 2018 at roughly 0.80X on average.

As of fiscal 3Q 2021, GM’s net debt leverage ratio stood at 0.70X, slightly below the historical average.

In short, GM’s net debt leverage with respect to equity has slightly declined in the latest quarter and has remained at this ratio for quite some time since fiscal 2018.

Therefore, GM has managed to keep its debt in check.

GM’s Long-term Liabilities To Equity Ratio

GM long-term liabilities to equity ratio

Other than debt instruments that bear interest expenses, General Motors also has other liabilities owed to 3rd parties that do not bear interest charges, including deferred revenue, deferred taxes, retirement benefits, etc.

As such, we will look at GM’s long-term liabilities to equity ratio in this discussion.

It’s worth looking at GM’s leverage in terms of long-term liabilities with respect to equity to see how the company’s total long-term liabilities have changed in the past few years.

In terms of long-term liabilities to equity ratio, GM’s results had not fluctuated much in the last 5 years between fiscal 2015 and 2021.

As of fiscal 3Q 2021, GM’s long-term liabilities to equity ratio has declined slightly to 1.80X, a record low in the last 5 years.

On a long-term basis, GM’s long-term liabilities leverage has not gone out of hand and has been managed quite reasonably well.

GM’s Total Liabilities To Equity Ratio

GM total liabilities to equity ratio

This chart is quite similar to the long-term liabilities to equity ratio in terms of trend.

The only difference is that the ratio is much higher in the current chart.

This is expected when you take into consideration of GM’s total liabilities that include everything that the company owes to 3rd parties.

For total liabilities, the respective leverage ratio also has not fluctuated that much for the last 5 years from fiscal 2015 to 2021, hovering around 4.0X.

In fiscal 2021, GM’s total liabilities to equity ratio has declined and gone as low as 3.0X as of the 3rd quarter, also a record low since fiscal 2015.

Again, GM has been able to manage its liabilities quite reasonably well and the leverage has been kept in check.

GM’s Total Debt To Asset Ratio

GM total debt to asset ratio

The total debt to assets ratio measures GM’s debt leverages with respect to the company’s entire assets.

In other words, this ratio shows the portion of GM’s assets that came from debt.

All told, GM’s total debt to total assets ratio has been rising steadily over the last 6 years.

The ratio shows that GM’s total debt reached nearly 50% of assets in fiscal 2020.

In fiscal 2021, GM’s total debt to assets ratio fell slightly to 46% as of the 3rd quarter.

At this ratio, nearly half of GM’s total assets were made up of debt and the rest were equity and other liabilities.

By the same token, nearly 50% of GM’s total fund or capital structure were interest-bearing debt instruments such as bonds, leases and credit facilities.

At this ratio, GM’s capital structure was about $0.50 of debt for every $1.00 of assets.

In short, GM’s total debt to assets ratio rose the most in the early years but has remained flat below 50% in most quarters since fiscal 2018, illustrating that the firm’s total debt has been reasonably well managed.

GM’s Total Liabilities To Asset Ratio

GM total liabilities to asset ratio

Similar to the total debt to assets ratio, the total liabilities to assets ratio measures the percentage of GM’s balance sheet being funded by liabilities.

Based on the chart, we can see that as much as 80% of GM’s balance sheets or capital structure has been funded by liabilities between fiscal 2015 and 2020.

In other words, the majority portion of GM’s balance sheet has been made up of liabilities such as debt instruments (both current and long-term), post-retirement benefits, pensions, and other liabilities.

In fiscal 2021, this ratio fell slightly to 75%, illustrating that GM’s total liabilities have declined with respect to total assets.

At this ratio, GM’s total asset or total fund was 75% liabilities and 25% equity.

Again, the steady ratio and the decline of the ratio seen in fiscal 2021 indicates that GM has de-leveraged and boosted its equity portion which is a sign of a healthy balance sheet.

Conclusion

In summary, GM’s debt leverage has been managed reasonably well and most of the ratios have remained steady or even declined in fiscal 2021.

A notable trend worth mentioning is that GM had only bumped up its debt leverage in fiscal 2020 when the COVID-19 pandemic just started.

However, GM’s debt leverage in fiscal 2021 had been considerably lower compared to 2020, illustrating that the firm had paid back most of its debt borrowed during the COVID crisis.

Moreover, most of GM’s debt to equity and debt to assets metrics have either remained flat or declined in fiscal 2021.

In short, GM has been able to maintain its debt and liabilities below or at the same level, comparable to the historical figures, and therefore, has a reasonably healthy balance sheet.

References and Credits

1. All financial figures in this article were obtained and referenced from GM’s quarterly and annual filings which are available in General Motors’ SEC Filings.

2. Featured images in this article are used under creative commons licenses and sourced from the following websites: Truck Hardware

Useful Statistics For Your Reference

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