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Should Investors Worry About GM’s $110 Billion Debt?

GM Cruise Origin. Source: GM earnings release.

Debt can help a company to grow but also can totally topple the firm when it can no longer afford to service the indebtedness.

It’s no exception for General Motors and debt has become an even more important metric for investors to look at as the company’s indebtedness has been reaching new highs.

As of fiscal 2021 Q3, General Motors or GM’s total debt has reached as much as $110 billion USD, even exceeding the company’s market capitalization.

Therefore, is there a cause for concern for GM’s growing debt levels which have topped a new high?

Yes, you should. Here is why.

In this article, we will look at several debt metrics of GM, including the total debt, net debt, debt breakdown, etc.

Apart from these metrics, we also will compare GM’s debt with the firm’s assets and revenue to find out how the company’s total debt performs with respect to these variables.

Let’s get started!

GM’s Total Debt

General Motors total debt

General Motors total debt

* Total debt data is extracted directly from GM’s balance sheets and consists of both short and long-term portions of interest-bearing debt.
* GM’s fiscal year begins on Jan 1 and ends on Dec 31.

The chart above shows GM’s total debt for the period from fiscal 2015 to 2021.

As seen from the chart, GM’s total debt has been rising steadily since fiscal 2015 and reached as much as $110 billion as of fiscal 3Q 2021, one of the highest figures ever reported by the company.

Moreover, GM’s total debt was particularly elevated during the 1st two quarters of 2020, reaching nearly $130 billion.

The trend shows just how easily the company can rack up debt when facing a crisis, the COVID-19 outbreak in this case.

During the onset of the pandemic which occurred in early 2020, GM significantly boosted its liquidity through debt instruments, including credit facilities, short and long-term debt.

GM’s Total Debt Breakdown

General Motors debt breakdown

General Motors debt breakdown

* Total debt breakdown is obtained directly from GM’s balance sheets and consists of both automotive and GM Financial portions.
* GM’s fiscal year begins on Jan 1 and ends on Dec 31.

The chart above shows GM’s total debts breakdown into 2 major categories by business segments and they are automotive and GM Financial.

GM automotive is the business that takes care of the automotive sector, including the design, manufacturing and distribution of GM’s automotive products such as new vehicles and parts.

On the other hand, GM Financial is the business segment that provides financial services such as loans and credit facilities to both retail and commercial customers.

All said, according to the chart above, it can be seen that GM Financial contributed the largest portion of the debt to the company, reportedly at more than 80% in 3Q 2021.

Additionally, GM Financial’s debt has been rising in the last 6 years and it is rising fast.

As of fiscal 3Q 2021, GM Financial’s debt reached as much as $92 billion, up 3.3% year-on-year.

In contrast, GM’s automotive debt has grown at a much slower rate compared to that of GM Financial over the same period and made up only 16% of the company’s total debt in 3Q 2021.

As of fiscal 2021 3Q, GM’s automotive debt came in at $17 billion, down 41% from the quarter a year ago.

While GM’s automotive debt has surged to nearly $40 billion in the 1st half of 2020, it dropped to only $17 billion as of Q3 2021.

Therefore, GM Financial’s debt has been in stark contrast with that of the automotive sector in which it has been steadily rising as opposed to the moderating trend of the automotive debt.

GM Financial’s Debt Breakdown

GM Financial debt breakdown

GM Financial debt breakdown

* GM Financial debt breakdown is obtained directly from GM’s balance sheets and consists of both secured and unsecured portions.
* GM’s fiscal year begins on Jan 1 and ends on Dec 31.

Not all debt in GM Financial is created equal.

In this case, we look at GM Financial’s debt breakdown which is divided into secured and unsecured portions as shown in the chart above.

According to GM, secured debt is debt that is backed by assets and payable only from proceeds related to the underlying pledged assets.

Here is a quote extracted from GM’s Q3 2021 filings regarding GM Financial’s secured debt:

  • Secured debt consists of revolving credit facilities and securitization notes payable.

    Most of the secured debt was issued by Variable Interest Entities (VIEs) and is repayable only from proceeds related to the underlying pledged assets.

In other words, GM Financial’s secured debt is backed by income-producing assets such as finance receivables and leasing-related assets and is therefore paid back through cash generated from these underlying assets.

In short, GM Financial’s secured debt is safe as the underlying assets can pretty much cover the entire liabilities of the secured debt.

On the other hand, GM Financial’s unsecured debt consists of senior notes, credit facilities and other unsecured debt.

As the name implies, these debts are unsecured and therefore, are not backed by any assets.

Since no assets are used to back and pay off these debts, the debt payments need to come from cash produced by GM’s business operations.

In other words, unsecured debts are not safe and the company will be in a dire situation if the business operations failed to produce enough cash to service these debts.

As seen in the chart, GM Financial’s unsecured debt has been growing as opposed to secured debt and has even exceeded the portion of the secured debt since fiscal 2018.

As of fiscal 2021 3Q, GM Financial’s unsecured debt topped $54 billion USD, a record high for the company and more than 40% higher than secured debt.

In short, GM Financial’s growing unsecured debt portion is a worrying trend for shareholders.

GM’s Net Debt

General Motors net debt

General Motors net debt

* Net debt comes from the author’s own measurement and consists of the difference between cash on hand and total debt (only automotive and GM Financial’s unsecured portions).
* GM’s fiscal year begins on Jan 1 and ends on Dec 31.

GM’s net debt is calculated by taking the difference between total cash on hand and total debt.

The total debt comes only from the automotive and GM Financial’s unsecured portions which we have briefly covered in prior discussions.

All told, GM’s net debt has been rising as seen in the chart above even after accounting for the company’s total cash position.

As of fiscal 2021 3Q, GM’s net debt topped $44 billion USD, a new high for the company.

Since GM Financial’s unsecured debt is the only debt that has been growing, it has been contributing to the company’s growing net debt.

GM’s growing net debt is a worrying trend for the company as these debts are mostly unsecured and therefore, are not backed by income-generating assets.

In short, GM’s business operations need to produce enough cash to service these debts.

GM’s Debt Vs Assets

GM debt vs assets

GM debt vs assets

* Total debt data comes from prior charts and total assets data is obtained from GM’s balance sheets.
* GM’s fiscal year begins on Jan 1 and ends on Dec 31.

According to the chart, GM’s total assets have been growing and the trend is in line with that of the growing total debt.

As GM has not been issuing equity to raise capital, that means GM has been using debt to grow its asset base as seen in the chart above.

Since fiscal 2015, GM’s total assets and total debt have been pretty much in line and are growing.

In short, GM has been using debt to fund its expansion instead of using equity.

Compared with equity, raising capital through debt is riskier as debt can topple a company when it is unable to service the interest portion.

Therefore, GM’s is becoming riskier with the growing debt.

GM’s Debt Vs Revenue Growth

GM debt vs revenue

GM debt vs revenue

* Total debt data comes from prior charts and TTM revenue data is calculated by the author based on the sum of GM’s quarterly revenue on a trailing 12-month or 4-quarter basis.
* GM’s fiscal year begins on Jan 1 and ends on Dec 31.

The chart above tells an even more worrying trend for General Motors.

As shown, GM’s TTM revenue has been on a decline in the last 6 years while total debt has been increasing.

While GM’s TTM revenue has significantly recovered in fiscal 2021 compared to that of 2020, it is still down considerably from historical highs.

Therefore, what’s wrong with GM?

GM’s Total Debt To Revenue Ratio

GM debt to revenue ratio

GM debt to revenue ratio

* Total debt to revenue ratio comes from the author’s own measurement and consists of the ratio of total debt to TTM revenue.
* Lower ratio indicates better results.
* GM’s fiscal year begins on Jan 1 and ends on Dec 31.

This chart is the same as the prior one except the current one is measured in ratio.

As seen, the ratio has been rising, meaning that GM’s operations have been worsening.

A declining ratio is what we need to see.

Instead, GM’s ratio has been on a rise, indicating that the company’s revenue has been sinking while debt has been rising.

Therefore, is GM the company that you want to invest in on a long-term basis?

Conclusion

GM’s total debts, both current and long-term portions, have increased tremendously since fiscal 2015 and totaled $110 billion as of fiscal Q3 2021.

GM Financial, a subsidiary of GM, contributed the most debt to the company since fiscal 2015.

GM Financial debt made up more than 80% of the company’s total debt as of 3Q 2021 and the unsecured portion of the debt has been the contributing factor to the firm’s growing indebtedness.

As a result, GM’s net debt has been on a rise too, driven primarily by the growing unsecured portion of GM Financial’s debt.

GM’s automotive and unsecured debt portions contain much higher risks as they are not backed by any income-producing assets and rely primarily on GM’s operating cash flow for the repayments.

Besides, GM’s debt to revenue ratio has been decreasing, indicating slowing revenue growth while having a rising debt level.

Therefore, is GM’s $110 billion debt a cause for concern for investors?

Yes, it is and investors should watch out for GM’s rising debt levels.

References and Credits

1. All financial figures in this article are obtained and referenced from GM’s quarterly and annual filings which can be obtained from GM Earnings Releases.

2. Featured images in this article are used under creative commons license and sourced from the following websites: GM Earnings Release and 2020 Outlook.

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Disclosure

The content in this article is for informational purposes only and is neither a recommendation nor a piece of financial advice to purchase a stock.

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