GM Cruise Origin. Source: GM earnings release.
As an investor myself, I am always interested in the debt incurred by a company. I will usually scrutinize the trend of the debt and find out whether it’s on an increasing or decreasing trend over multiple quarters or even years. If the debt has been increasing, investors are encouraged to dig deeper to find out the reasons of the increase and compare that with the trend of revenue and profit of the company.
In addition, it’s also important to find out how the company uses debt, whether debt has been used efficiently to grow the company or to reward investors in the form of dividend or share buyback. If it’s the former, then debt is used in the right way. On the other hand, if a company uses debt to pay dividend, that’s a big red flag that investors should pay attention to.
With that in mind, we should take the same approach when it comes to analyzing the debt of General Motors (NYSE:GM). In the company 4Q 2019 quarterly filing, GM total debt made up more than 50% of total liabilities, making it the largest liability in the balance sheet.
In general, GM total debt consists of both current and long-term debt and are divided into Automotive and GM Financial debt. Here is a snapshot of the current and long term liabilities in the balance sheet extracted from the Q4 2019 quarterly filing.
GM total liabilities Q4 2019
Automotive Debt
GM automotive debt consists of mainly unsecured debt. Most of it are revolving credit facilities and senior unsecured notes in which the company issued as bonds to fund the core operation and to repay maturing debt.
Here is a snapshot of GM automotive debt extracted from the annual filing dated Dec 31 2019:
GM automotive debt
GM Financial Debt
GM Financial is a subsidiary that provides financing services to retail customers and dealership. GM Financial debt contributes more than 80% of total debt to the company. In 2Q 2019, GM Financial debt is divided between secured and unsecured debt, with unsecured debt slightly more than secured debt.
Secured debt consists of revolving credit facilities and securitization notes payable. Most of it was issued by Variable Interest Entities (VIE) and is repayable only from proceeds related to the underlying pledged asset. Unsecured debt consists of senior notes, credit facilities and other debt instruments.
Here is a snapshot of GM Financial debt extracted from the annual filing dated Dec 31 2019:
GM Financial debt
Important Notes to Readers
Before discussing further about GM debt, I would like to stress that the data shown in the following series of charts consists of only short and long-term debt obligations. These charts have excluded other liabilities that involve contractual obligations such as purchase obligations, post-retirement benefits and operating leases.
To further illustrate, GM has a series of minimum commitments under contractual obligation, including purchase obligations, post-retirement benefits and operating leases which contributes quite a hefty amount of liabilities to the company.
In addition, the data represents only the face value or carrying amount of the debts. As such, future interest expenses resulting from these debts are not included as well.
Here is a snapshot of GM contractual obligations extracted from the statement dated Dec 31 2019:
GM contractual obligation Q4 2019
The figures shown in the snapshot above are undiscounted future contractual obligations which are slightly more than the carrying value disclosed in the balance sheet.
As seen from the snapshot above, GM automotive debt ($14 billion) and GM Financial debt ($92 billion) makes up about 80% of the company total contractual commitments as of Dec 31 2019.
The rest of the liabilities consists of future interest payments, finance and operating leases, post-retirement benefits and future purchase obligations. All these liabilities made up about 20% of GM total contractual commitments.
Chart of General Motors Total Debt
GM total debt
The chart above shows the trend of GM total debt for the previous 5 years from 2015 to 2019.
As seen from the chart, GM total debt has been on an increasing trend over the past 5 years. In 1Q 2015, total debt was only $48 billion but the amount reached record high in 1Q 2019 at $107 billion. After that, GM total debt remained elevated at this amount for the subsequent quarters in 2019 before declining slightly to $103 billion in Q4 2019.
As of Q4 2019, GM total debt was $103 billion, representing a year on year drop of about 2% or 1% when measured sequentially.
General Motors Total Debt Breakdown
GM debt breakdown
To further illustrate how GM total debt has grown so much in such a short amount of time, I have created the chart above to show the breakdown of GM debt.
The chart above shows GM total debt breakdown into two components: GM Automotive debt and GM Financial debt.
It can be clearly seen that GM Financial contributes the most debt to the company. As of 4Q 2019, GM Financial debt makes up more than 80% of total debt. Besides, the growth in total debt was also mainly caused by the growth of GM Financial debt.
For perspective, GM Financial has only $40 billion of debt in 1Q15 but the amount has grown close to $90 billion in 4Q19. The growth rate in GM Financial debt has been more than 2X over the 5-year period.
In contrast, GM Automotive debt has certainly grown less compared to GM Financial. In 1Q15, GM Automotive debt was only $9 billion and the amount has grown to slightly more than $14 billion in 4Q19, representing a growth rate of roughly 55% over the 5-year period.
In short, GM Financial has been the business segment that contributed the most growth in terms of short and long-term debt to the company.
Effect of Operating Lease on GM Total Debt
As of 4Q 2019, GM operating lease liability was only $1.24 billion. As such, its effect on total debt is negligible. Here is an excerpt from the 4Q 2019 quarterly filing regarding operating lease liability.
At December 31, 2019, operating lease right of use assets in Other assets were $1.1 billion, operating lease liabilities in Accrued liabilities were $239 million and non-current operating lease liabilities in Other liabilities were $1.0 billion.
Is GM Using Debt Efficiently?
With debts accumulating from quarter to quarter, how is GM using them? Is the company using debt in the right direction? In general, there are usually two ways in which a company could spend its money, either on the correct way or the not-so correct way.
The correct way would be improving the company in the form of business expansion such as assets acquisition and/or paying down old debts. The not-so correct way is enriching shareholders through shares buyback and dividends or both using debts. The latter practice is not encouraged as the company does not have sufficient funds for stock repurchase and dividends. Instead, the company is using borrowed capital to fund the stock repurchase and dividends.
For General Motors, I believe the company has been using debts in the right direction which is to expand its business through assets acquisition. Although the company has been paying dividend continuously since 2014 and partially buying back its shares, it has been self-sufficient when it comes to dividend payments. Over the past 5 years, GM has been generating enough operating cash flow to fund its dividends payout as seen from this article: GM Dividend Analysis.
But why assets acquisition you may ask? The reason is that GM runs a capital intensive business which requires a large asset base to generate revenue. All the assets, especially fixed assets such as machinery, buildings, equipment and factories, helps the company to generate sales.
Other than fixed assets, GM also uses debts to acquire intangible assets such as finance receivables which is a form of loans given to GM customers. In return, GM receives interest income from these finance receivables.
The following snapshot shows GM list of long-term assets in the balance sheets:
GM long-term assets
In short, GM needs these fixed and intangible assets to make money.
The following is a chart that I created to show the relationship between GM total debt and long-term assets:
GM total debt vs long-term assets
As seen from the chart above, the plot of total debt has been on an upward trend and the same trend is observed for the plot of long-term assets. In other words, both plots are on the same direction which is on a rising trend.
From this observation, we can conclude that there is close correlation between GM total debts and assets. In short, GM has been using debts to acquire valuable assets that help the company to make money.
Chart of GM Long-Term Asset Turnover Ratio
To further illustrate whether GM has been efficiently using debt to generate revenue or sales, we can look at the asset turnover ratio which measures GM long-term asset usage efficiency. The formula used for measuring this ratio is shown below:
GM Assets Turnover Ratio = (Total Revenue / Total Long-Term Assets) x 100%
For this purpose, I have created the following chart that shows General Motors historical asset turnover ratio for the past 5 years from 2015 to 2019.
GM long-term asset turnover ratio
Based on the chart, GM quarterly asset turnover ratio has been above 20%. The ratio was the highest back in 2015 when the figures had been more than 35%. After that, the ratio started to decline steadily which shows that GM long-term asset usage efficiency deteriorated and the ratio dropped below the 25% level for the first time in 3Q17.
The ratio hovered around the 25% for quite a few quarters in 2018 and 2019 before trending down again and declined to its lowest level in 4Q 2019 at 20%. The downward trend mirrors GM deteriorating assets usage.
Despite the slumping quarterly asset turnover ratio, the results are still acceptable. At a ratio of 25%, GM generate sales of $0.25 for every $1.00 of long-term assets per quarter. When measured on an annual basis, GM asset turnover ratio would be 100% and this ratio translates to $1.00 of revenue for every $1.00 of assets on an annual basis.
While GM asset turnover results is still acceptable, we need to watch out for the deteriorating asset usage on a quarterly basis. The deteriorating asset turnover ratio show that GM revenue has been on a declining trend whereas the opposite trend is observed for the company long-term assets.
The cause of the downward trend in asset turnover ratio can be attributed to GM stagnating sales since 2015. During the same period, long-term asset has been accumulating as a result of the increasing debts. This contradicting trend (rising asset but stagnating revenues) has caused the slump in asset turnover ratio as shown in the chart above.
In conclusion, the slumping asset turnover ratio is a cause of concern. However, GM debt usage is not something of a worry since the company has been using debt in the right way which is acquiring assets. In the end, the management has to effectively utilize the acquired assets to increase sales.
Chart of General Motors Interest Expenses
GM annual interest expenses
The final chart above shows the annual interest expenses incurred by the company as a result of debt over the previous 5 years from 2015 to 2019.
The trend of the plot above is in line with the growth of debt where interest expenses has grown at more than 2X since 2015. In 2015, GM incurred about $1.9 billion in interest expenses but GM interest expenses has grown to $4.4 billion in 2019.
Conclusion
GM total debts, both current and long-term, have trended higher since 2015 from around $48 billion in 1Q15 to as much as $103 billion in 4Q19.
GM Financial, a subsidiary of GM, contributed the most debt to the company. The respective business segment has contributed more than 85% of debt to GM as of 4Q 2019. Moreover, the growth of debt has been largely contributed by GM Financial and the growth rate has been a little over 100% for the 5-year period from 2015 to 2019.
GM uses debt to grow its long-term assets based on the close correlation result between the long-term assets and total debt charts.
While the quarterly GM asset turnover ratio has been more than 20% over the past 5-years, the ratio has deteriorated steadily from as high as 35% to the lowest level at 20% in 4Q 2019, signaling a poor asset utilization as a result from stagnating sales since 2015.
Despite a slumping asset turnover figure, GM still manages to generate a return of more than 100% from its long-term asset when measured on an annual basis. Indirectly, the result indicates that the company has managed to use debts efficiently as well as in the right direction which is to acquire valuable long-term asset to generates revenue.
References and Credits
1. Financial figures in all charts and images were obtained from GM Earnings Releases.
2. Featured images in this article are either used under creative commons license or sourced from the following websites: GM Earnings Release and 2020 Outlook.
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