The question of whether General Motors (NYSE:GM) can survive or go out of business will be a matter of the company’s ability to service its debt load.
GM’s ability to service its debt boils down to how well the company can cover its interest expenses which are usually the results of its indebtedness.
In this article, we will explore GM’s interest expenses coverage with respect to the company’s profits.
Specifically, we will look at GM’s operating income and the adjusted EBIT which stands for earnings before interest and tax and compare these metrics with the incurred interest costs.
Keep in mind that the operating income and adjusted EBIT are profits generated before taxes and interest expenses.
Therefore, by studying the profit coverage ratio with respect to the incurred interest expenses, we can find out whether General Motors’ financial well-being is on track to prosperity or failure.
The analysis of GM’s operating income and adjusted-EBIT with respect to interest expenses gives us the interest coverage ratio or the times interest earned ratio.
GM’s Automotive Interest Expense
Before heading off to the ratios, let’s take a quick look at GM’s incurred interest expenses for the period from fiscal 2015 to fiscal 2021 which are shown in the chart above.
Take note that GM’s incurred interest expense shown in the chart came entirely from its automotive segment.
These interest costs are a direct result of the automotive debt that GM carries on its balance sheets.
As of 1Q 2021, GM carried about $18 billion of automotive debt which consists of short and long-term portions according to this article: GM’s automotive debt load.
Based on the chart, GM’s automotive interest expense has been increasing steadily for the past 5 years, surpassing the $1 billion mark for the 1st time in fiscal 3Q 2020 from a TTM standpoint.
As of fiscal 1Q 2021, GM’s TTM automotive interest expense reached an all-time high of $1.16 billion, representing a year-on-year increase of over 40%.
Over the last 6 years, GM’s TTM automotive interest expense has more than doubled from around $400 million to $1 billion in the latest quarter.
GM’s increasing automotive interest expense has been a direct result of the company’s increasing debt load over the years.
In short, GM’s interest expenses have been on a rise.
GM’s Interest Coverage With Respect to Operating Income
GM’s rising interest expenses do not necessarily mean that the company is going into a deep hole.
The reason is that it still depends on GM’s ability to service its debt load or the interest expenses to be more precise.
Therefore, the interest coverage with respect to the operating income is the exact metric or the ratio that we need to measure GM’s financial health.
Looking at the chart above, GM’s interest coverage with respect to operating income has actually been declining since fiscal 2015.
The ratio bottomed out at 1.3X in fiscal 2Q 2020, the lowest the company has ever seen since fiscal 2015.
While GM’s interest coverage has been on a decline in the last 6 years, the ratio has been dangling above 1.0X, indicating that the company’s operating income has been sufficient to cover the incurred interest expenses.
Post-fiscal 2020, GM’s interest coverage ratio rebounded significantly.
As of fiscal 1Q 2021, GM’s interest coverage ratio reached as much as 8.0X, a level that was last seen in fiscal 2019.
GM’s rising interest coverage ratio post-2020 suggests that the company’s ability to service its debt levels has been improving.
While GM’s interest coverage ratio has been on a rise post-2020, the ratio was still considerably down from the historical high of 16X reported in fiscal 2016 and 2017.
Therefore, GM is still not out of the woods yet and the ratio may head downward again if business deteriorates.
However, at the time this article was written, GM’s financial health was on solid ground given that its latest interest coverage ratio has significantly risen.
GM’s Interest Coverage With Respect to Adjusted EBIT
The adjusted EBIT is a metric that came from GM’s financial statements and is adjusted by the company itself.
The adjusted EBIT is similar to the operating income but has been adjusted to exclude certain items that are considered not part of the company’s core operations.
Therefore, the adjusted EBIT specifically measures General Motors’ core performance without being distorted by non-core items and is a good metric to gauge GM’s ability to service its debt.
All told, looking at the chart, GM’s interest coverage ratio with respect to adjusted EBIT experienced a similar trend as the one with respect to operating income.
Since fiscal 2016, GM’s interest coverage ratio with respect to adjusted EBIT has been on a decline and hit only 4.2X in fiscal 2Q 2020, the lowest level the company has ever seen.
Despite being only 4.2X, GM’s adjusted EBIT was still significantly above its incurred interest costs.
Therefore, GM was still able to cover the incurred interest costs with the adjusted EBIT at more than 4X the ratio.
Similarly, GM’s interest coverage ratio subsequently rebounded and reached as much as 11.1X in fiscal Q1 2021.
At this ratio, GM’s adjusted EBIT was more than sufficient to cover the incurred interest costs.
Therefore, the significant rise in the interest coverage ratio indicates that GM has been able to improve its core performance.
Additionally, GM also has been able to tackle the COVID-19 challenges given the rising interest coverage ratio post-fiscal 2020.
To recap, GM’s automotive interest expense has been on a rise and reached a new high at $1.16 billion as of fiscal 1Q 2021.
Despite having a rising interest expense, GM’s interest coverage ratio with respect to both operating income and adjusted EBIT also has been on a rise, meaning that the company’s core operations have been able to cover the incurred rising interest costs.
As of fiscal 1Q 2021, these ratios have risen to 8.0X and 11.1X, respectively, a moderately high ratio since fiscal 2020.
GM still has much work to do given that its current interest coverage ratio was still significantly lower than its historical highs reported in fiscal 2016 and 2017.
Will GM go out of business? Highly unlikely.
At this moment, GM’s financial health was still pretty strong and the company should be well-positioned to ride through the COVID storm.
References and Credits
1. All financial figures in this article were obtained and referenced from GM’s annual and quarterly filings available in GM Investor Relations.
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