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Assessing GM Liquidity With Only 3 Ratios

GM Cruise autonomous vehicle. Source: Flickr

Liquidity is king when it comes to the life or death of 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 runs on huge working capital.

As you will see in the following charts, one of GM’s liquidity ratios shows that the company has, in fact, boosted its cash flow substantially through debts during the coronavirus crisis, indicating that the company will do whatever is necessary and at any cost to increase its liquidity even if it meant shouldering more debts.

Moreover, to boost its liquidity, GM also has suspended its share buyback program as well as the dividends payout indefinitely.

This practice shows just how critical the liquidity is for General Motors especially when the company anticipates a possible liquidity crisis in the near future driven by the COVID-19 outbreak.

In this article, we will look at General Motors’ liquidity ratios from the perspective of 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.

So, just sit tight and keep reading!

General Motors’ Current Ratio

GM current ratio

GM current ratio

* Current ratio is calculated by dividing current assets with current liabilities.
* Both current assets and current liabilities are GAAP measures and are extracted from General Motors’ balance sheets.

Let’s first look at GM’s current ratio which is shown in the chart above for the period from 2015 to 2020.

The current ratio is meant to measure the company’s short-term liquidity as it involves only variables such as current assets and current liabilities in the balance sheets.

According to the chart, GM’s current ratio had been slightly below 1.0 prior to 2020, indicating that the company’s total current assets had been insufficient to cover the short-term liabilities in those periods.

For instance, between 2016 and 2019, the average current ratio was around 0.95 which was slightly below the safe ratio of 1.0.

The current ratio has even declined to 0.90 in 4Q19, suggesting that the company was seriously short on liquidity.

In this case, GM barely had enough liquid assets to cover the short-term liabilities that came due within a year.

However, from the result, it does not necessarily mean that GM will go bankrupt immediately because these liabilities came due at a different time within a year.

Some of them could be due as soon as in a month while some of them could be as late as in a year.

As long as GM could settle these liabilities when they were due, the company would be fine.

Again, this situation indicates that GM had carried only enough liquid assets, including its cash, to pay for all the liabilities that came due within a year.

While I would prefer to see a current ratio above 1.0, GM may find that the liquidity model that it has been using working perfectly for the company.

In this case, GM has been using as little working capital as possible to save costs and improve efficiency.

Keep in mind that as long as GM can sell its products and make money, and the cash conversion cycle is not broken, there should not be any liquidity issue for the company even if the current ratio is slightly below the safe level of 1.0.

However, things will get tough for General Motors if the cash cycle is broken for whatever reasons and the company had difficulty accessing credits from banks.

Therefore, I would prefer to see a company with some extra cushion when it comes to liquidity.

Additionally, you may notice that GM had shore up its liquidity substantially in 2020 when the COVID-19 was rampaging the global economy.

From the chart, GM’s current ratio rose significantly above 1.0 throughout 2020.

As of 2020 Q4, GM’s current ratio stood at 1.01, which had slightly dropped from its peak figure of 1.12 reported in 2Q 2020.

This trend indicates that GM has the ability to immediately deploy extra liquidity when it is needed.

In this case, GM had used its credit facilities to borrow more debt to temporarily boost its short-term liquidity.

Here is a quote extracted from GM’s 2020 Annual statement regarding the company’s borrowings from its credit facilities:

  • In 2020, we borrowed $3.4 billion against our three-year, $4.0 billion facility, $2.0 billion against our three-year, $2.0 billion transformation facility and $10.5 billion against our five-year, $10.5 billion facility.

    We repaid all amounts drawn under the revolving credit facilities as of December 31, 2020.

    We had letters of credit outstanding under our sub-facility of $0.3 billion and $0.2 billion at December 31, 2020 and 2019.

All in all, GM has been versatile when it comes to liquidity and has the flexibility to significantly increase its liquid assets through its $18 billion-plus credit facilities.

General Motors’ Working Capital

GM working capital

GM working capital

* Working capital is calculated by substracting the current liabilities from the current assets.
* Both current assets and current liabilities are GAAP measures and are extracted from General Motors’ balance sheets.

Similar to the current ratio, GM’s working capital is also having the same trend where it located mostly in the negative region.

In this case, GM has been having a negative working capital between 2016 and 2019.

For example, GM’s working capital deficit reached as much as $10 billion in some quarters between 2016 and 2019.

As mentioned, General Motors’ negative working capital has been a result of the insufficient current assets to cover the respective current liabilities.

While GM may seem short on liquidity in those periods, the company actually has been fine since the demand for its products has been strong and the company was making money.

As a result, GM did not need to have plenty of working capital as the company had been able to covert inventories to cash fast enough to be used as working capital.

Again, GM was seen shoring up its working capital since 1Q 2020 when the COVID-19 outbreak has just started in the same period.

GM’s working capital reached as much as $10 billion in 2020 Q2 alone and that figure has slowly dropped to about $1 billion in 2020 Q4.

In short, GM has the ability to quickly deploy the needed working capital in times of a crisis due to the massive credit facilities at its disposal.

General Motors’ Quick Ratio

GM quick ratio

GM quick ratio

* Quick ratio is calculated by dividing adjusted current assets with current liabilities.
* Both current assets and current liabilities are GAAP measures and are extracted from General Motors’ balance sheets.

Lastly, the quick ratio or acid test ratio measures GM’s short-term liquidity by excluding certain items such as the inventory and other short-term assets that are considered not as liquid as cash and cash equivalents.

The quick ratio is similar to the current ratio but is a more refined version of the current ratio.

Besides, the quick ratio takes into consideration of GM’s only liquid assets such as cash and cash equivalents, marketable securities, accounts receivable, etc while excluding not-so-liquid assets such as the inventory.

That said, GM’s quick ratio has been below 1.0 in all quarters from 2015 to 2020, suggesting that the company’s only liquid assets had not been enough to cover all short-term liabilities.

This situation is sort of expected as GM barely had enough current assets to cover its current liabilities even with the inventories included.

When only highly liquid current assets are considered, GM’s liquidity gets worse.

At some time in the chart, GM’s quick ratio was seen dropping below 0.70, suggesting that the company’s only liquid assets were in serious deficit.

In this situation, GM would definitely plunge into a liquidity crisis if it had difficulty moving its inventories.

Similarly, GM’s quick ratio was seen going higher since 1Q 2020 at the onset of the COVID-19 pandemic.

GM’s quick ratio reached nearly 0.90 in 2Q 2020 but had dropped to 0.80 in 4Q 2020.

As mentioned, GM utilized its massive credit facilities to boost its liquidity during the COVID time.

Although the company’s quick ratio was considerably higher throughout 2020, it was still far from the safe level of 1.0 when adequate liquid assets were available for the coming current liabilities.

As a result, General Motors still carried certain risks when the respective quick ratio was significantly below the 1.0 level.

In short, GM’s liquidity will be in jeopardy if it has a hard time clearing its inventories.

For now, GM will be fine as long as the company can sell its products and has access to the massive $18 billion-plus credit facilities in times of a crisis.

Conclusion

The takeaway is that GM liquidity ratios, including the current ratio, working capital and quick ratio, have all been below the safe level prior to 2020.

In those periods, GM has been able to work perfectly fine with less working capital and lower current assets due mainly to the company’s efficient cash conversion cycle.

There were strong demand for GM products and the company was making money.

Hence, GM utilized as least working capital as possible to reduce costs and improve efficiency.

In 2020 when COVID came, GM’s business became less efficient and the company was seen quickly deploying extra liquidity with the help from its massive credit facilities (debt).

As long as GM can sell its cars, trucks and SUVs, be it in good or bad times, the company’s liquidity will be just fine.

References and Credits

1. All financial numbers in the charts in this article were obtained and referenced from GM’s annual and quarterly filings available in GM Investor Relation.

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

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

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