The question of whether General Motors (NYSE:GM) can survive or go out of business depends largely on the company’s ability to service its debt.
GM’s ability to service its debt boils down to whether the company can cover the respective interest expenses which are usually the results of indebtedness.
In this article, we will explore GM’s interest expenses coverage with respect to the company’s profits.
To further illustrate, 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 diving into the interest expenses coverage with respect to the profitability metrics, we can find out how well General Motors is covering the incurred interest costs.
The analysis of GM’s interest expenses coverage with respect to the operating income and adjusted EBIT 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 as 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.
For your information, GM carried about $17 billion of automotive debt as of fiscal 3Q 2021 based on this article – GM’s automotive debt.
Moreover, GM’s automotive debt also has been on a steady rise over the years, reaching record highs in fiscal 2020 but had slightly declined in fiscal 2021.
As a result, GM’s automotive interest expense also has been increasing, surpassing the $1 billion mark for the 1st time in fiscal 2020 on a TTM basis.
As of fiscal 3Q 2021, GM’s automotive interest expense reached $1 billion after topping out at nearly $1.2 billion in the prior quarter.
Over the last 6 years, GM’s automotive interest expense has more than doubled from around $400 million to $1 billion as of fiscal 2021.
GM’s increasing automotive interest expense has been a direct result of the company’s increasing debt levels over the years.
In short, GM’s interest expenses will keep growing as long as the company is racking up more automotive debt.
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 the debt 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 3Q 2021, GM’s interest coverage ratio reached as much as 10.0X, a level that was last seen in fiscal 2018.
GM’s rising interest coverage ratio in a post-pandemic world 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 since fiscal 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.
As a result, GM’s operating income was more than sufficient to cover the interest cost incurred.
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 measure GM’s debt coverage.
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 15X in fiscal Q3 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 in fiscal 2021 demonstrates GM’s improving core performance and therefore, should have no issue of servicing the debt.
To recap, GM’s automotive interest expense has been on a rise and reached as much as $1 billion on a TTM basis as of fiscal 3Q 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 improving and be able to cover the incurred rising interest costs.
As of fiscal 3Q 2021, these ratios have risen to 10.0X and 15.0X, 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.
In short, GM’s financial health was on solid ground as of fiscal Q3 2021 based on the expanding interest coverage ratio or the times interest earned ratio.
References and Credits
1. All financial figures in this article were obtained and referenced from GM’s annual and quarterly filings which are available in GM Investor Relations.
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