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A Peek Into GM Cash On Hand and Liquidity

Will General Motors (NYSE:GM) suspend its dividends? Does the company have enough cash to support its operations and business activities? How about paying down debts that will come due soon?

These are the questions that have often been asked about GM, especially in recent months when the coronavirus crisis has ravaged the automotive industry, causing the company to temporarily stop its North America vehicle production in March, 2020. Worst, the suspension may last through April and even May, 2020 if the situation does not improve.

Moreover, GM has also been experiencing weak vehicles deliveries in recent years and the result got worst when it posted the weakest wholesale vehicle sales of only 952,000 units in 4Q 2019. The result represents a year over year decline of 21.5% or 8% sequentially.

Not only are investors concerned about the cash flow of the company, but creditors as well are keen to find out where the company stands in terms of cash reserves and whether the company has enough cash to survive through the current crisis.

Most importantly, investors are eager to know how long the company’s operation can last with its current cash position if the weak vehicle deliveries coupled with production halt continues for a longer period of time.

In this article, we will explore GM’s cash on hand or cash position and track the historical result over multiple quarters to get a glimpse of the company’s cash pile.

While having some cash in the bank seems to make sense, it still depends on whether the amount can cover the cash outflow during any financial period. In this regard, we will look at GM’s cash consumption from the perspective of the company’s business operations and investments and measure if GM has enough cash on hand to support both of these activities.

Finally, we will look at how and where GM got its cash when the business activities failed to produce adequate cash flow to support both operating and investing activities.

Take note that cash position, cash on hand and cash reserves are meant the same thing and are used interchangeably in this article.

GM’s Cash On Hand

GM cash on hand

GM cash on hand

The chart above shows General Motors quarterly cash on hand or cash reserves in the last 5 years from 2015 to 2019.

The formula which I used to measure the company’s cash position is shown below:

Amount of cash on hand = Cash and Cash equivalents + Marketable Securities + Restricted Cash (only short-term portion)

Basically, the formula takes into account of all GM’s highly liquid assets such as cash or near cash forms that are reported under the current assets portion in the balance sheet.

To show you what constitutes the company’s cash and cash equivalents, marketable securities and restricted cash, I have taken a snapshot of the company’s financial statement that breaks down these liquid assets as shown below:

GM high liquidity assets

GM high liquidity assets

From the snapshot, the majority of cash and cash equivalents are invested in fixed deposits, US government bonds, corporate and sovereign debts which are relatively safe in nature. In terms of marketable securities, these are also safe investments in US government bonds, corporate and sovereign debt as well as a small amount of mortgage backed securities.

Not only do these investments produce interest incomes for General Motors, they are also highly liquid assets which can be converted to cash immediately whenever the company needs them.

Coming back to the chart above, GM’s cash on hand has been fluctuating in a tight range between $23 billion and $27 billion over the last 5 years. In average, the level of cash reserves hovered around the $25 billion mark, illustrating the company’s inability to grow its cash position or working capital all these years.

For example, GM was sitting at roughly $26.6 billion of cash reserves as of Q4 2019 but the amount represents an increment of only 4% from $25.6 billion 5 years ago in Q1 2015.

A constant or declining working capital may point to a decreasing sales and weakening vehicle deliveries which has caused the company to reduce the size of its operations in order to improve liquidity. The poor result was also shown in this article where investors can see that GM’s revenue has been decreasing over the years: GM’s revenue and profitability.

Nevertheless, the absolute values of GM’s cash position do not tell us much about the liquidity of the company and whether this cash pile is sufficient for the company to last through 2020 or longer. As a result, we will explore the company’s cash consumption or cash burn in the following discussion.

Ratio of GM’s Cash On Hand to Current Assets

Ratio of GM cash position to current assets

Ratio of GM cash position to current assets

Before going further into GM’s liquidity, I would like to briefly show you the ratio of GM’s cash position with respect to current assets for the last 5 years in the above chart.

As seen from the chart, GM’s ratio of cash on hand to current assets has increased quite significantly for the last 5 years from 2014 to 2019. For instance, cash on hand was roughly 30% of current asset back in Q1 2015 but the ratio has increased to 35% in 4Q 2019, representing a 17% increment over the 5-year period.

From prior discussion, we know that GM’s cash position has only increased by 4% over the 5-year period but we are seeing a 17% jump in the ratio. This result indicates that GM’s current assets or working capital have basically been declining much faster than cash position over the years.

This observation further proved that GM has been downsizing its business operations in order to save costs and improve efficiency.

Chart of GM’s Cash Consumption

To figure out whether GM has enough cash reserves to support its business activities as well as the required investment for growth, we need to look at the company’s cash consumption or cash usage.

In GM’s case, cash consumption consists of largely cash outflow that pays for operating activities and investments. Operating activities are basically GM’s main business operations such as vehicle production and deliveries.

On the other hand, investments are a form of cash outflow that pays for not only capital expenditures but also receivables such as loans as well as the purchase of leased vehicles. These expenditures are disclosed in the cash flow for investing activities which are shown below:

GM cash flow from investing activities Q4 2019

GM cash flow from investing activities Q4 2019

Other than capital expenditures, GM has also been spending cash in areas such as loan receivables and purchase of leased vehicles as shown in the snapshot above.

Why are these activities being accounted for as part of GM’s cash consumption you may ask? The reason is that these investments are basically the same as capital expenditures such as the purchase of property, plant and equipment which are essential to the future growth of the company.

For example, the cash outflow for the purchase of finance receivables are essentially loans that came from GM Financial to retail and commercial customers to finance the purchase of automobile products. Similarly, the cash outflow for the purchase of leased vehicles are due to clauses embedded in the leasing agreement where GM is obligated to purchase these vehicles back after the leasing term ends.

Of course, I have taken into account of the cash inflow generated from these investment when measuring the cash consumption.

In short, the cash consumption equation consists of the following components:

GM’s cash consumption = Operating Cash Flow – Capital Expenditures – Purchase of Finance Receivables + Collections from Finance Receivables – Purchase of leased vehicles + Sales of leased vehicles

With that said, I have created the chart below that is based on the above equation to tracks GM’s cash consumption for the last 5 years from 2015 to 2019.

GM cash consumption from operating and investing activities

GM cash consumption from operating and investing activities

As the chart shows, GM’s cash consumption or cash usage has been mostly negative, indicating that the company’s operating cash flow has not been sufficient to cover the company’s capital expenditures as well as other vital investments.

In fact, these investments have consumed more cash than GM can produce which has led to the cash deficit in most quarters. Some quarters even saw a cash deficit to the tune of -$8 billion such as in 1Q16.

The trend of the cash deficit which occurred across all quarters can actually be interpreted as a good development for GM. They basically indicate growth because when there is demand for GM’s product, there will be investments in these activities.

You can see that the cash deficit started to contract and even turned positive in recent years, which may indicate GM’s weakening vehicle deliveries and declining revenue.

Is GM’s Cash On Hand Sufficient to Cover Cash Consumption

Comparison of GM cash position with cash usage

Comparison of GM cash position with cash usage

The chart above shows GM’s cash on hand and cash consumption combined into a single chart.

As the chart shows, it’s very clear that GM’s cash position has been more than enough to cover cash usage for the last 5 years from 2015 to 2019.

In fact, GM’s cash reserves have been as much as 10X in average higher than cash usage in most quarters, indicating that the company has sufficient cash reserves to last through several quarters from 2020 and onward.

For instance, GM’s average cash on hand is roughly $25.8 billion over the last 5 years and the average cash usage is $2.3 billion per quarter based on the historical data.

Assuming that the company’s operating cash flow remains at the current level and also manages to refinance its existing debts, GM will still be able to continue operating for roughly 3 years, just by relying on its existing cash reserves alone.

The result shows just how much cash GM has in its coffer which will be sufficiently enough to pay for both business activities and investments in the coming quarters.

As of this discussion, GM should not run into any liquidity issue in the near term.

Chart of GM’s Cash Flow from Financing Activities

From prior discussion, we have seen that GM has been running into cash deficit in most financial periods when combining cash inflow from operations and cash outflow for capital expenditures as well as for other essential investments.

Despite having cash deficit all this while, GM still managed to maintain its cash on hand at a relatively constant amount as shown in the first chart. In fact, the figure has not changed much over the last 5 years and has even increased by 4% since 2015.

The question is how and where does the company get its sources of cash? The answer lies in cash flow from financing activities which is shown in the chart below.

GM cash flow from financing activities

GM cash flow from financing activities

The result in the chart above is the net of cash from financing activities, meaning that the figures reported have already taken into account of all inflow and outflow of cash movement in financing activities.

Having said that, GM reported almost entirely positive cash flow for all financial periods in the last 5 years except in 2019 when we saw that the company posted 3 consecutive quarters of negative numbers.

A positive figure implies that GM has raised cash through debts issuance and stocks offering whereas a negative number means the company has repaid its debts more than it had borrowed.

In short, GM has been borrowing through external capital injection to fund its growth all these years as seen from all the positive cash flow from financing activities in the chart. Besides, further investigation shows that the company’s total debts have increased dramatically over the years as a result of debt borrowings as seen from this article: GM’s total debt.

Conclusion

GM’s cash position has been hovering around the $25 billion level in average from 2015 to 2019, pointing to the company’s inability to grow its working capital over the years. Further investigation shows that the cash reserves with respect to current asset ratio has increased by as much as 17% between 2015 and 2019 whereas the company’s cash position has only increased by 4% during the same period.

The much faster increment of cash with respect to current assets may indicate the company’s downsizing of current assets in order to improve efficiency and liquidity.

GM’s cash consumption includes both operating cash flow and cash outflow for investments such as capital expenditures, finance receivables as well as purchase of leased vehicles that are considered vital for the future growth of the company. GM’s cash usage have been mostly in the red in most quarters, indicating that the generated operating cash flow has not been sufficiently enough to cover cash outflows in the last 5 years.

The combined cash on hand with cash consumption in a single chart shows that GM’s cash reserves has been more than enough to cover the cash deficit caused by operating and investment activities. In short, GM will not have any liquidity issue in the near term.

GM has funded its growth over the years through debts and stock issuance as seen in the chart of cash flow from financing activities.

References and Credits

1. All financial figures in this page were obtained from multiple GM’s quarterly and annual reports through its Investor Relation website: General Motors SEC filings.

2. Featured images in this article are used under creative commons license and sourced from the following websites: raymondclarkeimages.

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