The inventory is one of the most tracked asset especially for companies that carry a significant amount of inventory. From inventory and its comparison with respect to other metrics such as revenue and current asset, we can find out a lot of information about a company.
It’s no exception for General Motors (GM) as the company is a large auto manufacturer where its inventory makes up as much as 15% of its current asset (shown in the inventory to current asset chart below).
As an investor myself, I will always pay attention to the company inventory and a few more ratio such as the inventory turnover ratio and days sales in inventory to find out how well GM manages its inventory.
For GM, the inventory consists 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.
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 statement.
In this article, we will explore General Motors inventory and its components in multiple quarters to find out whether the inventory is growing or shrinking. Besides, we will also look at the comparison of inventory with respect to sales and current asset. Finally, ratio such as inventory turnover ratio and days sales of inventory will be studied to find out how well GM manages its inventory.
Chart of GM Quarterly Inventory
We will first look at the total inventory and find out what the long-term trend is for the inventory. The chart above tracks the quarterly inventory of GM from 2015 to 2019.
The inventory increased slightly throughout 2016 but then started to decline significantly in 2017 after GM sold its GM Europe subsidiary.
Overall, the long-term trend shows that inventory has been decreasing and reached the lowest point at slightly below $10 billion in 4Q18. Moreover, inventory has been flat throughout 2018 and 2019 and hovered around the $11 billion level.
Chart of GM Inventory Components
Other than the total inventory, we will also look at the inventory components to find out what makes up the total inventory.
The chart above represents the breakdown of inventory into its components. There are only two inventory components disclosed in the GM financial statements and they are: (1) finished products and (2) productive materials (inclusive of work in progress). The finished products inventory are made up of completed vehicles and service parts such as vehicles replacement parts.
You may notice from the chart above that the finished products component is the largest inventory component, making up slightly more than half of total inventory. The rest of the inventory comes from productive material or raw material. From the chat above, the trend shows that when inventory declines, both components also decline at roughly the same rate.
When we look at the inventory components, it makes sense to have the finished products making up slightly more than half of the inventory. The reason is that the finished products are closely related to sales.
Moreover, the chart shows that GM is having quite a balance inventory between finished products and raw materials. You certainly do not want to see a bunch of inventory consists entirely of either raw materials or finished products because that shows the company may have problems managing its inventory effectively.
Percentage of GM Finished Products to Total Inventory
Since the finished products inventory relates to sales closely, I have created the chart above to track the changes in finished products inventory with respect to total inventory expressed in percentage from 2015 to 2019.
The finished products inventory ratio in the chart above represents the percentage of finished products with respect to total inventory. The ratio measures the amount of finished products inventory as a percentage of total inventory.
From the chart above, the percentage of finished products makes up about 60% in average of total inventory. This percentage figure is quite reasonable as it shows that GM inventory consists of slightly more finished products than raw materials.
Moreover, the chart also indicates that GM does not have an inventory problem where the inventory consists of either too much or too less of finished products. For example, if the percentage figure in the chart above is more than 80%, it means that GM is having too much of finished products in its inventory and it shows that the company is having problem clearing off finished products inventory.
On the other hand, if the figure is too low such as below 20%, it means that GM is having too little of finished product inventory and may have stocked up too much raw materials. In this situation, the company has too little finished products to generate sales.
In short, the figure in the chart above seems to be doing just fine with the percentage of finished products inventory fluctuating in between 50% and 60% of total inventory.
GM Inventory as a Percentage of Current Asset
The chart above represents total inventory as a percentage of current asset. The reason I created this chart is to track how much inventory represents as a percentage of working capital.
We all know that current asset equals working capital of a company. As such, we do not want to see too much of total inventory being tied up as working capital.
If the percentage figure is too high such as above 60% or 70% of current asset, it may signal liquidity issue in the company as too much capital is tied up in the inventory and the company would have problem generating sales.
Based on the chart above, GM seems to be doing fine with its total inventory making up about 15% of its current asset. The percentage figure has declined significantly from the high of 20% in 2015 and 2016. As such, it shows that GM has been managing its inventory quite effectively.
GM Inventory as a Percentage of Revenue
The chart above shows a plot of total inventory as a percentage of sales. The purpose of this chart is to track the efficiency of GM in utilizing its inventory to generate revenue.
According to the chart above, the plot has been trending lower from its peak value of around 40% in 1Q15 to the latest value of around 30% in 2Q19.
The trend of the plot tells us that GM has been using less inventory with respect to revenue to generate the same amount of revenue in the latest quarter. In general, GM has been very efficient in managing its inventory and turning it into sales revenue.
Effectively, GM is managing its inventory very well by carrying less inventory in its balance sheet. With less inventory, the company should be able to reduce storage cost and free up some capital tied to inventory.
Overall, less inventory but more revenue should bode well for investors.
Chart of GM Inventory Turnover Ratio
Previously, we have seen that GM is getting more effective in managing its inventory from the plot of inventory as a percentage of revenue.
Similarly, the plot of inventory turnover ratio above shows that GM has also been managing its inventory quite efficiently.
The inventory turnover ratio is another important metric that measures a company efficiency in inventory management. For example, the chart above shows that the ratio has been trending higher from 2015 to 2019. In 1Q15, the ratio hovered around 2.0 but the ratio has increased to 2.5 in 2Q19.
What that means is that GM has managed to turn over its inventory faster in 2019 compared to 2015 since the ratio is higher in 2019 than in 2015.
The figure in the chart above represents the quarterly ratio. The numbers may be slightly different if you calculate the ratio from a yearly perspective but it will not be too much different. Even though the quarterly ratio will be slightly different from a yearly ratio, both ratio represents the same concept.
I used the quarterly ratio because it is more refined and tracks accurately the efficiency of GM in turning over its inventory to sales from quarter to quarter.
In short, GM has been improving its efficiency in inventory management from 2015 to 2019 by analyzing the inventory turnover ratio in the chart above.
Chart of GM Days Sales In Inventory
The days sales of inventory chart above is similar to the inventory turnover ratio plot except that it is in number of days.
For example, in 1Q15, the inventory holding period was around 40 days. The trend of the plot above shows that the days sales in inventory has declined from 2015 to 2019. In the latest quarter, the figure has declined to about 35 days.
Unfortunately we can’t tell whether the figure of days sales in inventory is good or bad just by looking at the chart above. The ratio needs to be compared with the industry ratio and also with that of GM competitors such as Tesla and Ford.
One thing we can be sure is that GM has managed to reduce this ratio and that means the company has been efficiently managing its inventory by reducing its inventory holding period from 45 days to just 35 days before they are being sold.
GM inventory has been shrinking from about $14 billion in 1Q 2015 to about $11 billion in 1Q19. The reason for the decline may have been attributed to the sales of its GM Europe subsidiary in 2017 or it could be that the company has managed to efficiently reduce its inventory.
Besides, we have looked at the inventory components which are mainly divided into two segments, namely: (a)finished products and (b)productive materials.
The finished products component is the largest inventory, making up slightly more than half of total inventory. Over the 5-year period, the percentage of finished products inventory has fluctuated between 50% and 60%, indicating that GM has not been holding too much or too little of finished products inventory. Indirectly, this illustrates that GM has been efficiently holding the right amount of finished products to generate sales.
When we looked at the total inventory as a percentage of current asset, the figure in the chart hovered between the range of 15% and 20% over the 5-year period. It shows that GM did not hold excessive inventory with respect to working capital. This is another metric that shows the company has been managing its inventory quite efficiently.
Moreover, the plot of inventory with respect to revenue shows that percentage has been declining over the 5 year period. That tells us that the company has been using less inventory to generate the same amount of revenue. Effectively, this is another metric that shows GM is efficiently managing its inventory.
Finally, we looked at the inventory turnover ratio and the days sales in inventory. The trend of the plots shows that GM has been improving its inventory turnover ratio and days sales of inventory over the 5-year period. In the latest quarter of 2Q 2019, the inventory turnover ratio was 2.5, indicating that the company sold off its inventory in roughly 1.2 months. The days sales of inventory in 2Q 2015 indicates that the company inventory holding period is 35 days which is equal to about 1.2 months of holding period.
In conclusion, based on several analysis from the charts above, we can conclude that GM has been managing its inventory quite efficiently.
Disclosure: The authors wrote this article themselves, and it expresses their own opinions. The authors are not receiving compensation for writing the article. The authors have no business relationship with any company whose stocks are mentioned in this article.
1. All information in this article was obtained from GM Shareholder Information.
2. Featured image was obtained from BiERLOS.
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