The inventory is one of the most tracked assets especially for companies where the inventories represent a significant portion of the assets. There is a lot of information in which investors and analysts can extract by analyzing the level of inventory alone as well as its respective ratio with respect to other metrics such as revenues.
For General Motors (NYSE:GM), the company is one of the leading auto manufacturers and it carries a significant amount of inventories in its balance sheet. As of 4Q 2019, GM has roughly $10.4 billion of inventories, representing 13% of current asset or about 5% of total assets.
As an investor myself, I will always pay attention to a company’s inventory and a few more ratio such as the inventory turnover ratio and days sales in inventory to find out how well the company manages its inventory. It’s no exception for General Motors as its inventory turnover and days of sales can point to a wealth of information that could potentially tell us about the financial well-being of the company.
With that said, in this article, we will explore General Motors’ inventory levels and its components in multiple quarters in addition to tracking the inventory with respect to sales and current assets. Moreover, ratio such as inventory turnover ratio and days of sales will be studied and tracked for multiple financial periods to find out how efficient GM manages its inventory.
What Makes Up General Motors’ Inventories
GM’s inventories consist of the following components:
- 1. Productive materials (raw materials), supplies and work in process
- 2. Finished products (inclusive of service parts)
Productive materials or raw materials primarily consists of steel, aluminum, resins, copper, lead and platinum group metals. The company stated that it does not carry substantial inventories of such raw materials in excess of levels reasonably required to meet its production requirement.
Finished products are new vehicles in transit for deliveries and used vehicles returned from daily rental car companies and vehicles utilized by GM’s employees.
For GM, the inventories are stated at the lower of cost or net realizable value and are reviewed periodically to determine if inventory quantities are in excess of expected usage or if they have become obsolete. If there is a write-down in inventory, the charges will be reflected in operating expenses in the income statements.
Chart of GM Quarterly Inventory
We first look at the total inventory and find out what the long-term trend is for the inventory. The chart above tracks GM’s quarterly inventory levels from 2015 to 2019.
GM’s inventory increased slightly throughout 2016 but then started to decline significantly in 2017 after GM sold its GM Europe subsidiary. As of Q4 2019, GM’s inventory reached the lowest level at only $10.4 billion but was slightly higher than the $9.8 billion recorded a year ago.
Overall, the long-term trend shows that GM’s inventory has been on a downtrend over the 5-year period. Between 2015 and 2019, GM’s total inventories have decreased by as much as 26% with 2019 being modestly higher compared to 2018 on a year over year basis.
The declining inventory may have been caused by the deteriorating sales and vehicle wholesale deliveries over the years as shown in these articles: GM’s automotive sales and GM’s vehicle wholesale deliveries.
On the other hand, another reason for the declining inventory could be due to GM downsizing its operations over the years in view of the challenging automotive industry. The fact is that the company has been restructuring its global operations and one of which was the sale of its European subsidiary back in 2017.
Whatever the reasons are, GM has been trying to operate on a smaller inventory level as seen in the current chart in order to save costs.
Chart of GM’s Inventory YoY Growth
The chart above represents GM’s quarterly inventory year over year growth rates between 2015 and 2019.
As seen from the chart, GM’s inventories have been on a declining trend with 2017 being the hardest hit year as seen from the double-digits negative figures throughout all quarters in 2017.
GM saw its inventory turned slightly higher in 2018 when year over year decline was reduced to low single digit throughout all quarters. In 2019, GM’s inventories further improved compared to 2018 on a year over year basis when the company posted 3 consecutive quarters of positive growth in inventories.
Chart of GM Inventory Components
Other than the total inventory, we will also look at the inventory components which are shown in the current chart above.
As mentioned in prior discussion, GM’s total inventories can be broken down into 2 components which are: (1) finished products and (2) productive materials (inclusive of work in progress). For the finished products inventory, other than new and used vehicles, they are also made up of service parts such as vehicles replacement parts.
You may notice from the chart that the finished products component has always been the largest inventory component between 2015 and 2019, making up slightly more than half of total inventory throughout all financial periods. However, the ratio of finished products to total inventory seemed to be declining over the years and the differences between finished products and raw materials were seen narrowing in 2019.
Nonetheless, the long-term trend shows that both components have been on a declining trend at roughly the same rate. We may see slightly different results in 2019 when raw materials modestly ticked up compared to 2018 while finished products inventory was more or less flat in the same year.
The chart shows that it makes sense to have finished products making up slightly more than half of total inventory considering that finished products are closely related to revenue generation.
Overall, GM has been having quite a balance inventory between finished products and raw materials. Between 2015 and 2019, we do not see a scenario where the proportion of one inventory component dominated entirely over the others. The result indicates that GM has been quite efficient in managing its inventory over the years.
Ratio of GM Finished Products to Total Inventory
The chart above measures the proportion of GM’s finished products inventory to total inventory and is a predecessor to the chart of GM’s inventory components which was discussed in prior paragraphs.
In a separate calculation, GM’s finished products made up about 59% in average of total inventory between 2015 and 2019. This percentage figure is quite reasonable as it shows that GM’s total inventories consist of slightly more finished products than raw materials.
The ratio was higher back in 2015 at about 60% but had dropped to 55% as of 4Q 2019, indicating that GM’s total inventories were almost equally divided between raw materials and finished products.
Again, this proportion of inventory makes more sense as the inventory consists of neither too much nor too less of finished products and raw materials considering that GM’s global sales has been sort of flat or even deteriorating in recent years.
Ratio of GM Inventory to Current Assets
The chart above represents total inventory as a percentage of current asset. The purpose I created this chart is to show how much inventory represents as a percentage of current assets or working capital.
We all know that current asset equals working capital for a company as the current assets are liquid assets that are near cash or cash forms that can be converted to cash in a year. As such, we do not want to see too much of inventory being tied up in current assets.
In general, if the ratio is too high as in above 50% of current assets, the company will most likely run into liquidity problem when the inventory is not fast enough to be converted to cash through sales or if sales were taken a hit in the near term.
Based on the chart above, GM seems to be doing fine with total inventories making up less than 20% of current assets from 2015 to 2019. The ratio was higher back in 2015 at roughly 20% but has since declined modestly to 15% in 4Q 2019.
On a long-term basis, the ratio has been relatively flat and has fluctuated tightly between the 15% and 20% range, indicating that GM has been managing its inventory with respect to current assets quite effectively all this while. Moreover, the ratio has been even more rigid since 2017 and has stayed at the 15% mark from 2017 to 2019 without much fluctuation.
In short, GM’s moderately low inventory to current assets ratio show that the company should not have any liquidity issue even if sales were to be hit in the near term as the company has plenty of other liquid assets such as cash and cash equivalents to cover its short-term working capital requirements.
Ratio of GM Inventory to Revenue
The chart above shows the plot of GM’s inventory as a percentage of sales or revenue. The purpose of this chart is to track if there is an excess of total inventory with respect to revenue. The ratio is a good indicator of GM’s inventory management efficiency. For example, when sales are slow, we should not see a continuous inventory build up moving forward. The opposite is true when sales are good. In this case, inventory should not drop in excess of its average continuously moving forward. In either case, the management should take appropriate actions when it anticipates that sales are going to be affected.
According to current chart, the plot has been trending lower as shown by the respective dotted trend line. The ratio was the highest back in 2015 at 40% but has dropped to the lowest at 25% in 4Q18 in which the ratio has largely diverted from the respective trend line.
GM management took action and increased the inventory in the following quarter of 1Q19. As a result, we are seeing an uptick in inventory in 1Q19 and the ratio was back on the trend line at roughly 30%. However, the ratio kept increasing the following quarters and reached nearly 35% of revenue by the end of 2019.
Between 4Q18 and 4Q19, inventory with respect to sales has increased quite significantly from 25% to as much as 35% even though on an absolute basis, the amount of inventory has increased only by 6% compared to a year ago. On a sequential basis, GM’s total inventory in 4Q19 has actually declined by as much as 12% from the prior quarter. Therefore, the culprit must have come from sales deterioration in 2019 which has caused the continuous increase in the ratio.
I expect to see inventory to remain unchanged or to be further reduced in 2020 in view of the significant sales slowdown toward the end of 2020.
Overall, GM’s inventory with respect to revenue is still pretty much in a manageable level but investors need to keep an eye on the ratio in 2020.
Chart of GM Inventory Turnover Ratio
The inventory turnover ratio is another important metric that measures a company efficiency in inventory management. The chart above shows GM’s inventory turnover ratio over the past 5 years from 2015 to 2019 on a quarterly basis.
The formula used to calculate the inventory turnover ratio is shown as below:
Inventory Turnover Ratio = Cost of Automotive Sales / Closing Inventory
The long-term trend indicates that GM has slowly improved the turnover of its inventory as seen from the uptrend in the chart.
The ratio was roughly 2.2 in 2015 but has since increased to 2.5 as of 4Q 2019. While the increment has been minimal, it still represents a major milestone for the company especially in an environment where cut-throat competition is the norm.
At a ratio of 2.5, GM managed to turn its inventory 2.5 times within a quarter. In other words, GM managed to turn the inventory to sales which means from raw materials to finished products and later on to sales as many as 2.5 times per quarter.
Chart of GM Days Sales In Inventory
The days of sales in inventory chart above is similar to the inventory turnover ratio plot except that it is in number of days.
For example, GM’s inventory holding period was around 40 days in 1Q15 and the ratio has dropped considerably to only 35 days as of 4Q19.
GM managed to achieve a days of sales ratio of only 30 days in 4Q18. However, the ratio has crept up steadily throughout 2019 and reached 35 days by 4Q19. The increase in inventory holding period in 2019 has been in line with what we saw in the inventory to revenue ratio in which the ratio has also steadily risen, reflecting GM’s deteriorating sales throughout 2019.
Chart of GM Finished Products Days of Sales
An industry standard that has been used by most automotive companies including Tesla in measuring inventory turnover is the days of sales in inventory for finished products. The finished products here refers to only new vehicle inventories.
For GM, its respective days of sales for finished products is shown in the chart above over a 5-year period between 2015 and 2019.
The formulate used in calculating the days of sales of inventory is shown as below:
Days of sales for finished products = (new car inventory / trailing deliveries ) X 261 working days
(Source: automotive news)
For quarterly calculation, I have slightly modified the above equation. Instead of 261 working days, I have used 65 days. I have also modified the new car inventory to finished products which include not only new vehicles but also used vehicles as well as service parts.
As seen from the chart above, GM’s days of sales for finished products has dropped quite significantly compared to days of sales for total inventory. For instance, days of sales for finished products recorded in 4Q 2019 was only 12 days instead of 35 days for total inventory.
Why is there such a big difference between the two? The reason can be primarily attributed to the different type of inventory used. For example, the days of sales for finished products uses only finished products instead of including raw materials. On the other hand, the days of sales for total inventory includes raw materials as well as finished products and thus the longer inventory holding period.
For GM, the respective days of sales for finished products has been on a downtrend between 2015 and 2019 which is consistent with what have seen in the days of sales for total inventory.
While total inventory to sales ratio has crept up slightly in 2019, the days of sale for finished products has been consistently at 12 days during the same year, indicating that GM has managed to keep finished products holding period unchanged despite significant sales slowdown throughout 2019.
To recap, GM inventory has shrunk from about $14 billion in 1Q 2015 to only $10 billion in 4Q19 over the 5-year period, primarily due to restructuring initiatives which included the sale of its European subsidiary in 2017 and sales deterioration in 2019.
Based on the analysis of a series of charts, we can conclude that GM has been managing its inventory quite effectively as seen from the balanced proportion between raw materials and finished products inventory.
Besides, GM has also been improving its sales channels, bringing down the days sales of inventory and finished products to its record low by the end of 2019.
The only thing that investors need to watch out is the inventory to sales ratio which has slightly ticked up throughout 2019 despite GM’s effort in reducing inventory level during the same year.
References and Credits
1. All information such as financial figures and statistic in this article were obtained from financial statements available in GM Shareholder Information.
2. Featured images in this article are used under creative commons license and sourced from the following websites: BiERLOS.
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