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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 capital structure.

The capital structure relates to how GM leverages through 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 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 equity or equally both.

That said, there a few ratios that can be used to analyze GM’s debt 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 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 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 debtGeneral 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. 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.

3. 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

GM total debt to equity ratio

* Total debt is a GAAP measure and consists of only interest-bearing debt instruments.
* Equity is a GAAP measure and consists of both controlling and non-controlling equities.
* Debt to equity ratio comes from the author’s own calculation.

The chart above shows General Motors’ total debt to equity ratio for the period from 2015 to 2020.

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 in 2Q 2020, the highest GM has ever reported.

However, in subsequent quarters, the ratio has declined and reached 2.2 as of 4Q 2020, indicating that GM’s debt leverage has gone down slightly from its peak.

At a ratio of about 2.2, GM’s debt leverage was $2 dollar of debt to $1 dollar of equity.

Historically, this figure is considered on the high side as GM’s debt leverage was much lower at only 1.50 in 2016.

When compared that with 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

Breakdown of GM total debt to equity ratio

* Both Automotive and GM Financial debt are GAAP measures and consist of only interest-bearing debt instruments in the respective business segments.
* Equity is a GAAP measure and consists of both controlling and non-controlling equities.
* Automotive and GM Financial debt to equity ratio comes from the author’s own calculation.

To clearly see what the breakdown is like for GM’s debt leverage, I have created the chart above that shows GM’s Automotive and GM Financial debt to equity ratio in separate plots.

According to the chart, GM Financial clearly has higher debt leverage compared to GM automotive.

Between 2015 and 2020, GM Financial has been the business sector that saw its debt ratio ballooning and thus, contributing to the increasing leverage in total debt.

At one point over the chart, GM Financial debt to equity ratio reached nearly 2.50.

As of the 4th quarter of 2020, GM Financial’s debt to equity ratio declined to about 1.90, suggesting that the financial arm of the company has slightly reduced its debt leverage with respect to equity.

While GM Financial debt ratio may have declined in the 2nd half of 2020, it was still historically on the high side.

In contrast, GM automotive’s debt over equity ratio has been flat at about 0.30 between 2015 and 2019.

The automotive debt to equity ratio only increased significantly to 0.80 in the 1st half of 2020 during the onset of the COVID-19 pandemic.

The reason is that GM automotive has been hit the hardest when the COVID-19 outbreak just started.

However, the debt to equity ratio recovered to its pre-pandemic level by the 4th quarter of 2020 at 0.35 when GM’s automotive business recovered in the 2nd half of 2020.

In short, GM automotive’s debt leverage is low and the debt to equity ratio indicates that it was only at 0.35 as of 2020 Q4.

At this ratio, GM automotive was slightly leveraged at $0.35 dollar of debt to $1.00 dollar of equity.

GM’s Long-term Liabilities to Equity Ratio

GM long-term liabilities to equity ratio

GM long-term liabilities to equity ratio

* Long-term liabilities are GAAP measures and are shown as reported in GM’s annual and quarterly reports.
* Equity is a GAAP measure and consists of both controlling and non-controlling equities.
* Long-term liabilities to equity ratio comes from the author’s own calculation.

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 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.

Then, the ratio declined steadily and reached only 2.00 as of 2020 Q4.

GM’s long-term liabilities to equity ratio increased significantly in the 1st half of 2020 during the onset of the COVID-19 outbreak.

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 2020 implies the company’s increasing leverage in terms of long-term debt and borrowings.

When GM’s automotive business recovered by the 4th quarter of 2020, the company has paid back some of the borrowings that led to the decline in the long-term liabilities to equity ratio.

GM’s Total Liabilities to Equity Ratio

GM total liabilities to equity ratio

GM total liabilities to equity ratio

* Total liabilities are GAAP measures and are shown as reported in GM’s annual and quarterly reports.
* Equity is a GAAP measure and consists of both controlling and non-controlling equities.
* Total liabilities to equity ratio comes from the author’s own calculation.

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 has also been flat for the last 5 years from 2015 to 2020, hovering between 4.0 and 5.0.

GM’s total liabilities to equity ratio was the highest in 1Q 2018 at more than 5.00, showing that the company’s leverage was the highest in that quarter alone.

In subsequent quarters, the ratio declined steadily and reached around 3.75 in 3Q 2019.

The ratio went up again to reach 4.60 in 1Q 2020 when the COVID-19 outbreak hit in the 1st half of 2020.

In the 2nd half of 2020, GM’s total liabilities to equity ratio steadily went down and reduced to its pre-pandemic level of 3.73 in 2020 Q4, suggesting that the company has been deleveraging due to an improving business outlook.

GM’s Total Debt to Asset Ratio

GM total debt to asset ratio

GM total debt to asset ratio

* Total debt and total assets are GAAP measures and are shown as reported in GM’s annual and quarterly reports.
* Total debt consists of only interest-bearing debt instruments that come from the automotive and GM Financial sectors.
* Equity is a GAAP measure and consists of both controlling and non-controlling equities.
* Total debt to assets ratio comes from the author’s own calculation.

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 against total assets has been rising steadily over the last 5 years.

The ratio shows that GM’s total debt reached nearly 50% of assets as of 2020 Q4.

At this ratio, GM’s entire assets were made up of 50% debt and the other 50% were equity and other liabilities.

By the same token, as much as 50% of GM’s capital structure came from interest-bearing debt instruments such as bonds, leases and credit facilities.

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

GM’s Total Liabilities to Asset Ratio

GM total liabilities to asset ratio

GM total liabilities to asset ratio

* Total liabilities and total assets are GAAP measures and are shown as reported in GM’s annual and quarterly reports.
* Equity is a GAAP measure and consists of both controlling and non-controlling equities.
* Total liabilities to assets ratio comes from the author’s own calculation.

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 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.

One notable trend in the chart is that GM’s capital structure has not changed much and the ratio 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 also being funded by liabilities.

Conclusion

In summary, GM’s total debt made up about 50% of its balance sheets or total assets.

Out of the 50% debt portion, GM Financial took up most of that portion and has been the major contributor to the increasing company’s debt leverage between 2015 and 2020.

In contrast, GM automotive has been slightly leveraged as reflected in the 0.35 debt to equity ratio between 2015 and 2019.

The debt to equity ratio has increased only during the COVID-19 outbreak in 2020 but has reduced to its pre-pandemic level as of 2020 Q4.

In terms of liabilities, GM’s total fund or the entire balance sheets have been mostly made up of liabilities at 80%.

References and Credits

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

2. All ratios come from the author’s own calculations.

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

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