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Every organization thrives to achieve the best out of a market through creating value that is articulated to its mission and vision. Making an investment decision by investors need an analysis of the firm's operations and this is achieved through ratio analysis and its implication on the development and growth of an organization. In this analysis, we will consider the General Motors company and Toyota as its competitor.
General Motors Company (GM) a multinational company from the United States of America. The company was established in 1908 by William Durant. GM is popularly known for the production of vehicles and vehicle parts. However, the company also provides financial services. It has its headquarters in Detroit. It has four main business segment which are GM financials, GM international operations, GM South America, and GM North America. The company supplies its goods and services to approximately 37 countries worldwide. It conducts its business in close to 140 countries. Some of its key vehicle brands are Wuling, Holden, GMC, Chevrolet, Cadillac, and Buick. Besides the production of vehicles and vehicle parts, GM manufactures engines of aircrafts, industries, marine, and locomotives. It also makes electronic appliances for air conditioning and refrigeration. In 2016, it sold more than 10 million vehicles which was a milestone since its inception. Additionally, up to 2007, GM was the largest manufacturer of automobile since 1931. Following the 2008/09 financial crisis, the company underwent some major structural adjustments where it disposed off some brands and issued an initial Public Offering in 2010 after being bailed out of bankruptcy by the US government. It started making profits in 2010 after the reorganization. For the past three years since 2015, GM sales have been declining.
Horizontal Analysis of The Income Statement and The Balance Sheet
It is an analysis of financial statement that shows trends between variables in different financial years. It is important since it gives organizations managers and potential investors the performances trend for an organization and how it will thrive in the near future.
Income Statement Analysis
From the above income statement, it indicates that the revenue of the firm increases by 10% from $135,725 thousands to 149, 184 thousand in the 2015-2016 financial year. However, the revenues declined in the following financial year 2016-2017 where the revenues fell by -2% to $145, 588 thousand from $149, 184 thousand in 2016. Additionally, the cost of revenue in the organization followed the same pattern by revenues. It at first increased by 9% in 2015-2016 from $118, 299 thousand to $128,868 thousand 2016-2017 fiscal years and later fell by -2% to $125997 thousand in 2017. This increase in the cost of sales is attributed to the firm's introduction of a new brand of vehicle in the market by the name Chevrolet Cruze. The brand is not known by many and this led to the loss of 22% of the company's sales in 2016-2017 financial year. As a result of the above increases, it is also evident that the gross profit of the organization decreased by -4% from $20,316 thousand in 2016 to $ 19,591 thousand in 2017 however, the organization had a gross profit of $20, 316 thousand in 2016 compared to that of $17, 426 thousand in 2015. This represent an increase of 17% during that financial year. This increase is attributable to the firm's financial business branch good performance during the year and the high sales in the GM North America's branch as well. The company has been reducing its expenditure on sales, general and administration expenses as a way of reducing loses. The operating income of the income have been increasing for the three years from $5,538 thousand in 2015, $9,962 thousand in 2016, and $10, 016 thousand in 2017. The first increase in the operation income in 2016 represents 80% increase from 2015 and the latter represents 1% increase from 2016. Following the trends in the financial performance, the net income in the organization followed the same pattern where it decreased in financial year 2016 by -3% and further declined by -59% in 2017. The company performance has been basically declining in the three years referred to in the study. The main reasons are the introduction of new brand of vehicle which is barely known and also the introduction of new brands of vehicles by their competitor during the same period (General Motors, 2018). The competitors' brands are Hyundai Civic which was introduced as 2015 came to an end and Hyundai Elantra which was introduced in the market in January and February 2016. The GM company has been struggling finding dealership for the new brand of vehicle thus losing the market in 2016 and 2017. Its sales in the US have also been declining. The company has also been adjusting itself to the new taxation laws introduced. Thus, undergoing a kind of revolution. It is also suffering from reducing revenues as a result of the sale of one of its revenue generating business Opel-Vauxhall. However, the sold business was falling due to the nature of business climate in the European market.
Balance Sheet Analysis
GENERAL MOTORS COMPANY
CONSOLIDATED BALANCE SHEET
FOR THE YEARS 2015,2016 AND 2017
ASSETS 2017 2016 2015 2016/2017 increase /decrease % 2015/2016 increase /decrease %
Current Assets $ "000" $ "000" $ "000"
Cash and cash equivalents 15,512 12,574 15,238 23.37% -17.48%
Short-Term Investments 8313 11,841 8,163 -29.79% 45.06%
Net Receivables 28685 24,827 26,388 15.54% -5.92%
Inventory 10663 11040 13764 -3.41% -19.79%
Other Current Assets 5571 15921 5855 -65.01% 171.92%
Total current assets 68,744 76,203 69,408 -9.79% 9.79%
Non- Current Assets
Long Term Investments 30,281 25,997 27,701 16.48% -6.15%
Fixed Assets 79,135 76,320 51,401 3.69% 48.48%
Goodwill 0 0 0 0.00% 0.00%
Intangible Assets 5849 6149 5947 -4.88% 3.40%
Other Assets 4,929 3,849 3,021 28.06% 27.41%
Deferred Assets Charges 23544 33172 36,860 -29.02% -10.01%
Total Non-current Assets 143,738 145,487 124,930 -1.20% 16.45%
Total assets 212,482 221,690 194,338 -4.15% 14.07%
LIABILITIES 10,198 13,544 14,443 -24.70% -6.22%
Accounts Payable 49,925 49,226 51,655 1.42% -4.70%
Short-term debts 26965 23797 19562 13.31% 21.65%
Other current liabilities 0 12158 0 -100.00% 0.00%
Total current liabilities 76,890 85,181 71,217 -9.73% 19.61%
Long term debts 67,254 51,326 43,549 31.03% 17.86%
other liabilities 32138 41108 39249 -21.82% 4.74%
Deferred liability charges 0 0 0 0.00% 0.00%
Misc. stocks 0 0 0 0.00% 0.00%
Minority Interest 1199 239 452 401.67% -47.12%
Total non-current liabilities 100,591 92,673 83,250 8.54% 11.32%
Total liabilities 177,481 177,854 154,467 -0.21% 15.14%
EQUITY 0.00% 0.00%
Common stocks 14 15 15 -6.67% 0.00%
capital surplus 25371 26983 27607 -5.97% -2.26%
Retained earnings 17,627 26,168 20,285 -32.64% 29.00%
Treasury stock 0 0 0
other equity -8011 -9330 -8036 -14.14% 16.10%
Total equity 35001 43836 39871 -20.15% 9.94%
Total equity and liabilities 212,482 221,690 194,338 -4.15% 14.07%
Total assets increased from $ 194,338 thousand to $ 221,690 thousand in 2015 and 2016 respectively. However, the value of the total assets reduced in 2017 to $212, 482 thousand. During the financial year, the company suffered reduced asset value due to the effect of UK exiting the European Union market. The company let go the European Opel-Vauxhall business during this period.
The total equity increased from $ 39871 thousand in 2015 to $43836 thousand in 2016. This is an increase of 10%. However, the following financial year 2017, the company's total equity reduced by 20% to $35,001 thousand. The company increased its total liabilities by 15% in the financial year 2015-2016. However, it reduced the total liabilities by -0.21% in 2017.
GM Ratio Analysis
liquidity ratio: Formula 2015 2016 2017
current ratio Current assets current liabilities 6940871217=0.9746 7620385181=0.8946 6874476890=0.8941
acid test ratio Current assets-stock current liabilities 69408-1376471217=0.783 76203-1104085181=0.765 68744-1066376890=0.7554
Cash ratio cash current liabilities 1523871217=0.214 1257485181=0.148 1551276890=0.202
From the computation, it is an evidenced that the current ratio decreased from 0.9746 to 0.8946 in 2015 and 2016 and then decreased further to 0.8941. The decrease in current ratio indicates a decreased level of operation or decreased level of holding stock or advancing credits to customers. The ratio is below 1 which is the industry benchmark and this shows that the firm is able to meet its financial obligations when it falls due. Increase in liquidity ratio gives the firm ability to borrow more credits in a financial institution through increased credit rating according to Morales and Zamora (2018).
It shows firm ability to meet its obligations without holding stock. From the analysis, it indicates that the quick ratio of the firm decreased from 0.783to 0.765 and 0.7554 in 2014,2015 and 2016 respectively. According to Morales and Zamora (2018), the decrease in the current ratio indicates that the firm is holding more stock as tied up capital hence limiting the operations and efficiency of the firm.
Cash ratio of the firm decreased from 0.214 to 0.148 and the increased to 0.202 in 2014,2015 and 2016 respectively. and this indicates that the firm's ability to meet its short-term obligations is limited since a decrease in cash to current liability ratios indicates that the firm's ability to meet its short-term obligation is low hence threatens the solvency of the organization according to Morales and Zamora (2018). However, in 2017, the company improved.
The competitors of the organization as stated above is Toyota Company which is in the same industry and its liquidity ratios are as follows (Nasdaq, 2018):
liquidity ratio: 2015 2016 2017
current ratio 1.09 1.13 1.03
acid test ratio 0.96 1.0 0.89
Cash ratio 0.32 0.34 0.34
For the competitor's analysis, it indicates that GM company is in a lower liquidity position as compared to its competitors since the liquidity ratio is below the industry benchmark.
Based on the analyses and comparison with the competitors, I would recommend an investor to invest in Toyota since it has the following strengths as an organization.
Its liquidity in terms of current ratio is above the industry benchmark of 1.
The firm's revenues have been decreasing and this indicates lack of growth.
Even though the GM company is also a going concern and the increase in profits in 2016 indicates an increased level of chances of the declaration of dividends in the organization which gives an investor an assurance of receiving dividends, its revenues reduced in 2017.
GM company's level of profit in 2017 decreased so the declaration of dividends is vested in the management
GM company's leverage through long-term debts has increased over the three years and this shows that the firm's efficiency is decreasing and it may face solvency risks in future.
General Motors. (2018). General Motors US Sales Information | GM.com. Retrieved May 7, 2018, from http://www.gm.com/investors/sales/us-sales-production.html
Morales-Diaz, J. & Zamora, R. (2018). The Impact of IFRS 16 on Key Financial Ratios:. A New Methodological Approach. Accounting in Europe, 105-133.
Nasdaq. (2018). TM Key Financial Ratios. Retrieved May 7, 2018, from https://www.nasdaq.com/symbol/tm/financials?query=ratios
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