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A Peek Into GM Cash On Hand and Liquidity

Will General Motors (NYSE:GM) restore its suspended dividends payment? 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 are often asked about GM, especially in recent months when the coronavirus crisis hits new high, causing many companies, including GM, to temporarily close some of its manufacturing plants.

Moreover, GM has also been experiencing weak vehicle deliveries in recent years when less than 1 million vehicle deliveries was reported in 4Q 2019, bringing the year over year growth rate to -21.5%.

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 the age of the coronavirus.

More importantly, investors are eager to know how long the company’s operation can last with its current cash position if the weak vehicle sales coupled with the COVID-19 disruption continue 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 meaningfully cover the cash outflow during any financial period. In this regard, we will look at GM’s cash flow from the company’s business operations and investments, and compare that with GM’s cash on hand to find out how the 2 stack against each other.

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’ total cash on hand or cash reserves in the last 5 years from 2015 to 2020 on a quarterly basis.

The total cash includes all liquid assets, mostly cash and cash equivalents, and is measured with the formula below:

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

Basically, the formula considers only GM’s highly liquid assets such as cash or near cash assets that are reported in the balance sheets.

To show you what constitutes GM’s cash and cash equivalents, marketable securities and restricted cash, the snapshot below shows an example of what makes up the company’s cash assets:

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 that can be converted to cash immediately whenever the company needs them.

Coming back to the chart above, GM’s cash on hand has been less than $30 billion over the last 5 years. However, the company’s total cash assets exceeded $40 billion in 2020 and increased to nearly $50 billion in 2020 1Q.

As of 2Q 2020, GM’s cash position sat at $41 billion. While lower by as much as 18% compared to the prior quarter, the 2020 Q2 figure was still significantly higher than the historical average.

General Motors’ higher than average cash reserves in 2020 may have been attributed to the COVID-19 outbreak, causing the company to shore up its cash assets in preparation for the worst scenario.

Ratio of GM’s Cash On Hand to Current Assets

GM cash position to current assets ratio

GM cash position to current assets ratio

Before going further into GM’s liquidity check, 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.

This ratio shows the proportion of the company’s cash assets to total current assets. It shows what percentage of current assets is made up of cash or cash equivalents.

The chart shows that GM’s ratio of cash on hand to current assets has been on a steady increase from 2015 to 2020. The ratio has increased from 30% in 2015 to nearly 50% in 2020. At a ratio of 50%, as much as half of GM’s current assets are made up of cash and cash equivalents.

We can see that the jump in the ratio was the most significant in 2020, most likely due to the COVID-19 pandemic which has caused the company to prepare for a possible liquidity crunch.

GM’s Aggregate Cash Flow

GM’s aggregate cash flow consists of cash flow from operating and investing activities.

Cash flow for operating activities relates to the changes in working capital such as inventories purchase, receivables, prepaid expenses, accrued liabilities, etc.

On the other hand, cash flow for investments is cash received and spent on not only capital expenditures but also receivables such as loans as well as the purchase of leased vehicles.

The related investment activities are shown in the snapshot below:

GM cash flow from investing activities Q4 2019

GM cash flow from investing activities Q4 2019

Aside from capital expenditures, GM also invests in loan receivables and the purchase of leased vehicles.

These are investments in assets such as finance receivable and leased vehicles that are essential for the future growth of the company. These assets generate recurring leasing revenue as well as loan interest income for General Motors.

In short, the aggregate cash movement can be calculated with the following formula:

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

Chart of GM’s Aggregate Cash Flow (Quarterly)

GM cash flow from operations and investments (quarterly)

GM cash flow from operations and investment (quarterly)

The chart above shows GM’s cash movement based on cash flow from operating activities and investments.

According to the chart, GM’s aggregate cash flow was mostly in the red, suggesting the company’s inability to generate sufficient operating cash flow to cover the respective capital expenditures and investments.

In 2020 2Q, GM’s cash flow totaled nearly -$8 billion. In other words, GM suffered a cash deficit to the tune of $8 billion in 2Q 2020 alone, mainly due to the negative operating cash flow.

Chart of GM’s Aggregate Cash Flow (TTM)

GM cash flow from operations and investments (TTM)

GM cash flow from operations and investments (TTM)

From a trailing 12-months (TTM) standpoint, General Motors is making good progress towards positive cash flow.

In fact, GM managed to consistently generate positive cash flow between 2019 and 2020 on a TTM basis.

The company’s goal of positive cash flow generation was being derailed in 2Q 2020 when the TTM figure turned negative to slightly more than $5 billion, largely driven by the cash deficit of $8 billion in the same quarter.

Chart of GM’s Free Cash Flow (TTM)

GM free cash flow

GM free cash flow

When we exclude the company’s investment expenditures on receivable and purchases of leased vehicles, GM managed to achieve a positive free cash flow in most quarters as shown by the chart above.

In this aspect, GM’s free cash flow consists of only operating cash flow and capital expenditures which is measured using the formula below:

GM’s free cash flow = Operating Cash Flow – Capital Expenditures

In general, GM’s free cash flow has been improving in the last 5 years and reached $10 billion from a TTM standpoint in 2019 and 2020.

However, the company’s free cash flow decreased significantly to only $2 billion on a TTM basis in 2Q 2020, suggesting the severe impact that the COVID-19 disruption has on General Motors’ financials.

Comparing GM’s Cash On Hand with Aggregate Cash Flow

GM cash position and aggregate cash flow comparison

GM cash position and aggregate cash flow comparison

The chart above shows GM’s cash on hand and cash movement comparison.

In most quarters, GM’s cash position has been more than sufficient to cover the cash movement between 2015 and 2020.

In fact, the company’s cash reserves are multiple times higher than the cash outflow.

For instance, GM’s average cash reserves are $27.5 billion for the last 5 years whereas the average cash outflow is only $2.6 billion 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 be able to operate for a minimum of 1 year, just by relying on its existing cash reserves alone.

The result shows just how much cash GM has in its bank and the existing amount will be more than enough to pay for both business activities and investments in the coming quarters.

In short, GM should not run into any liquidity problem in the near term.

GM’s Cash Flow from Financing Activities

Despite consistently suffering a cash deficit, GM still managed to maintain its cash position at a relatively stable amount. In fact, the figure has even increased since 2015.

The question is how and where does the company get its sources of cash? The answer can be found in the 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 considered all inflow and outflow of cash movement in financing activities.

Having said that, GM reported an entirely positive cash flow from financing activities for all financial periods except in 2019 in which the company posted 3 consecutive quarters of negative numbers.

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

Based on the chart, GM borrowed the most in 1Q 2020 at more than $23 billion, most likely in preparation for the COVID-19 disruption which may cause a liquidity crisis in the future.

In most parts, GM has notably issued debts from 2015 to 2020 in all financial periods, with 2020 being the worst offender.

For now, have you found the answer to why GM has been able to keep its cash position at such a relatively elevated level?

Summary

In summary, General Motors’ cash on hand was at an all-time high of nearly $50 billion in 2020, largely driven by the COVID-19 pandemic which has caused the company to keep a large balance of cash reserves in preparation for a possible liquidity crunch.

At the same time, GM’s aggregate cash flow totaled nearly -$8 billion in 2Q 2020, causing the company’s TTM free cash flow to dip to only $2 billion while cash movement turned negative to more than $5 billion in the same quarter.

Even so, the company’s cash position was more than enough to cover the cash outflow multiple times and the company could possibly survive for a minimum of 1 year, relying mostly on the existing liquid assets.

GM financed its expansion mainly by using debts as seen from the entire positive figures in the cash flow from financing activities, with 2020 being the most indebted year for the company.

References and Credits

1. All financial figures in the charts were obtained and referenced from multiple GM’s quarterly and annual reports from 2015 to 2020 and they can be found through the 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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