Analyzing GM Liquidity With Only 3 Ratios

GM Cruise autonomous vehicle. Source: Flickr

Liquidity is king in a business. Without liquidity or cash flow, a profitable business can still succumb to bankruptcy.

It’s no exception for General Motors (NYSE:GM) especially when it’s an assets-heavy auto manufacturing company that requires huge working capital.

To give you an idea about the criticality of liquidity, GM suspended its share buyback and dividend indefinitely during the COVID-19 crisis in 2020, so that the company could save cash (liquidity).

This article explores General Motors’ liquidity ratios which include the current ratio, working capital and quick ratio (or acid test ratio).

Keep in mind that these ratios are meant to check on the company’s short-term liquidity, usually within a year from the reported date of the company’s financial filings.

Let’s get started!

Investors interested in GM’s debt and a longer-term liquidity check may find more information on this page: GM debt problem.

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Definitions

To help readers understand the content better, the following terms and glossaries have been provided.

Current Ratio: The current ratio is a financial metric that measures a company’s ability to pay off its short-term liabilities with its short-term assets. It provides insight into the liquidity position of a business. Here’s the formula for calculating the current ratio:

Current Ratio = Current Assets / Current Liabilities

Current Assets: These are assets that are expected to be converted into cash or used up within one year. They include cash and cash equivalents, accounts receivable, inventory, and other short-term investments.

Current Liabilities: These are obligations that the company needs to settle within one year. They include accounts payable, short-term debt, accrued liabilities, and other short-term financial obligations.

A current ratio greater than 1 indicates that the company has more current assets than current liabilities, suggesting it is in a good position to cover its short-term obligations.

A current ratio less than 1 indicates that the company may have difficulty meeting its short-term liabilities, which could signal potential liquidity issues.

A current ratio that is too high may also suggest inefficiency, as it could indicate that the company is not effectively utilizing its assets.

Working Capital: Working capital is a financial metric that represents the difference between a company’s current assets and current liabilities. It indicates the company’s ability to cover its short-term obligations with its short-term assets. Here’s the formula for calculating working capital:

Working Capital = Current Assets − Current Liabilities

Positive Working Capital: Indicates that the company has more current assets than current liabilities, suggesting a strong liquidity position and the ability to meet short-term obligations.

Negative Working Capital: Indicates that the company has more current liabilities than current assets, which could signal potential liquidity issues and difficulties in meeting short-term obligations.

Quick Ratio: The quick ratio, also known as the acid-test ratio, is a financial metric that measures a company’s ability to meet its short-term liabilities using its most liquid assets.

This ratio is more stringent than the current ratio because it excludes inventory and other non-liquid assets from current assets, focusing only on assets that can be quickly converted to cash, including cash, investment, and receivables. Here’s the formula for calculating the quick ratio:

Quick Ratio = (High Liquidity Assets Such As Cash, Investment & Receivables) / Current Liabilities

A quick ratio greater than 1 indicates that the company has more quick assets than short-term liabilities, suggesting a strong liquidity position.

A quick ratio less than 1 indicates that the company may struggle to meet its short-term obligations without selling inventory, which could signal potential liquidity issues.

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General Motors Current Ratio

GM current ratio

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The definition of current ratio is available here: current ratio.

GM’s current ratio has significantly improved in recent years, with the ratio exceeding 1.0X since 2020. As of the end of 2023, GM’s current ratio measured at 1.08X, slighly lower than the 1.10X in 2022.

Prior to 2020, GM’s current ratio had been below 1.0X, suggesting a deficit of current assets with respect to current liabilities during those years.

Although the automaker’s current ratio dipped below 1.0X, it did not necessarily mean that GM could go bankrupt or face insolvency immediately. Instead, it just means there was a risk of default.

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General Motors Working Capital

GM working capital

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The definition of working capital is available here: working capital.

GM had negative working capital prior to 2020 but its working capital has improved dramatically in recent years, as shown in the chart above.

As seen, GM has been having impressive working capital during most of the post-pandemic periods, with figures topping over $9 billion in fiscal year 2022. The automaker’s working capital dipped slightly to $7 billion at the end of fiscal year 2023.

GM’s surging working capital in post-COVID time indicates the company’s ability to quickly obtain cash when necessary.

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General Motors Quick Ratio

GM quick ratio

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The definition of quick ratio is available here: quick ratio. The quick ratio or acid test ratio measures GM’s liquidity during a stress test.

The quick ratio excludes certain current assets such as inventory and prepaid expenses which are considered not as liquid as cash and receivables.

That said, GM’s quick ratio had been below 1.0x in most fiscal years, suggesting that the company’s cash and near-cash assets alone were not sufficient to cover all short-term liabilities.

As of the end of fiscal year 2023, GM’s quick ratio (acid test ratio) declined slightly to 0.83X from a year ago.

Since GM’s cash and receivables alone have not been sufficient to cover its near-term liabilities, the company needs to rely on other short-term assets, including inventory, to cover the cash shortfalls.

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General Motors Extra Liquidity

GM automotive liquidity

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Apart from its own cash, GM also uses short and long-term financing such as credit facilities to boost its liquidity when necessary.

Here is a quote extracted from GM’s 2024 annual report regarding the company’s credit facilities:

• “We use credit facilities as a mechanism to provide additional flexibility in managing our global liquidity.

  Our Automotive borrowing capacity under creditfacilities totaled $17.1 billion at December 31, 2023, which consisted primarily of three credit facilities.”

Therefore, GM Automotive had $16.4 billion borrowing capacity under its credit facilities as of 2023. Of course, these are debt that needs to be paid off if GM ever needs to use the credit facilities. However, the credit facilities can come in handy and provides financial flexibility to the company.

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Conclusion

The takeaway is that GM liquidity ratios, including the current ratio, working capital, and quick ratio, have been above 1.0X since 2020, indicating sufficient short-term assets to meet all shor-term liabilities.

Apart from its own cash and near-cash assets, GM also has access to extra cash under its credit facilities, thereby further boosting its liquidity.

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References and Credits

1. All financial numbers presented in this article were obtained and referenced from GM’s SEC filings, earnings reports, and other financial statements which are available in GM Investor Relation.

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

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Disclosure

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