GM and Toyota General Motors

¶ … GM and Toyota

General Motors (GM) and Toyota are not only two of the car companies that dominated the American automotive market for generations, but also two of the largest car companies in the world. As a result, they are oftentimes considered two of the major players in the global automotive market. However, both companies have faced significant challenges in the last several years. By examining their working capital management, income statements, balance sheets, and statements of funds, this essay hopes to compare and contrast the financial health of the two companies.

Working Capital Management

Working capital is "a measure of both a company's efficiency and its short-term financial health" (Investopedia, Working capital, 2013). Determining the working capital is a mathematically simple process, as Working Capital = Current Assets -- Current Liabilities (Investopedia, Working capital, 2013). A positive working capital means that the company can pay off its short-term liabilities and is indicative of financial health, while a negative working capital means that a company cannot pay off its current short-term liabilities with its current assets and is indicative of potential financial problems (Investopedia, Working capital, 2013). Therefore, working capital provides a snapshot of a company's financial health, particularly when used in conjunction with other measures of economic health.

"If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short-term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. For example, it could be that the company's sales volumes are decreasing and, as a result, its accounts receivables number continues to get smaller and smaller" (Investopedia, Working capital, 2013). Therefore, it may be critical to examine not only a company's working capital, but also the changes to that working capital over time in order to determine whether a company's short-term solvency is improving or declining over-time.

In addition to providing a window into a company's financial health, the working capital ratio also provides a window into the company's operations. "Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations" (Investopedia, Working capital, 2013). Therefore, this tool can not only provide insight into a company's finances but also into its operations.

GM's working capital is 14.48 billion. "This is 44.75% lower than that of Consumer Goods sector, and 87.29% lower than of Auto Manufacturers- Major industry, the Working Capital for all stocks is 2474.35% lower than the firm" (Macroaxis, GM working capital, 2013). Even more important than GM's working capital at this moment in time is the trend in its working capital, which reflects positive changes in the company. In 2009, GM was in serious trouble, so much so that it did not appear that the company would be able to survive. However, GM "has been through bankruptcy and back, exiting Chapter 11 reorganization in 2009. Since then, the manufacturer of automobiles under brands such as Chevrolet, Buick, and Cadillac has done well and was the largest auto manufacturer by vehicle unit sales in 2011"(Chu, 2012). Part of this success has come as a result of the bankruptcy, which relieved GM of many of its costly obligations, such as pension and health liabilities (Chu, 2012). This changed the ratio of assets to liabilities, and had a positive impact on the company's working capital.

Toyota's working capital is roughly half that of GM. "Toyota Motor Corporation has Working Capital of 6.56 B [billion]. This is 74.99% lower than that of Consumer Goods sector, and 94.24% lower than that of Auto Manufacturers- Major industry, the Working Capital for all stocks is 1065.43% lower than the firm" (Macroaxis, Toyota working capital, 2013). Like GM, Toyota faced a significant financial crises in 2009. However, unlike GM, Toyota did not undergo a bankruptcy. At first blush, it may seem as if by avoiding bankruptcy, Toyota was able to more consistently keep a better working capital, so that its financial performance should be seen as better than GM's. However, that ignores the fact that filing for bankruptcy protected GM and removed many of its liabilities from its current balance sheet. Like other companies who experienced the downturn, Toyota was impacted by the overall drop in the car industry. Moreover, trying to match up supply and demand without putting assets into unsold products was one of the challenges that the company faced (Johnson, 2009).

Income Statements

An income statement is a "financial statement that measures a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year" (Investopedia, Income statement, 2013). Moreover, an income statement is generally divided into two parts: the operating and non-operating sections (Investopedia, Income statement, 2013). While both sections impact income, the operating section is generally of far more interest and use to potential investors. "The portion of the income statement that deals with operating items is interesting to investors and analysts alike because this section discloses information about revenues and expenses that are a direct result of the regular business operations. For example, if a business creates sports equipment, then the operating items section would talk about the revenues and expenses involved with the production of sports equipment" (Investopedia, Income statement, 2013). In contrast, the non-operating section does not provide information about the daily business. "The non-operating items section discloses revenue and expense information about activities that are not tied directly to a company's regular operations. For example, if the sport equipment company sold a factory and some old plant equipment, then this information would be in the non-operating items section" (Investopedia, Income statement, 2013). Of course, investors still want to be aware if a company is liquidating assets in order to determine why it might be doing so.

Forbes makes the income statements of companies available on its website. GM's income statement is below:

View: Annual Data | Quarterly Data

All numbers in thousands

PERIOD ENDING

09/2012

06/2012

03/2012

12/2011

Income Statement

Operating Revenue (Revenue/Sales)

37,576,000

37,614,000

37,759,000

37,990,000

Total Revenues

37,576,000

37,614,000

37,759,000

37,990,000

Cost of Sales

33,046,000

32,946,000

33,158,000

25,852,000

Cost of Sales with Depreciation

33,046,000

32,946,000

33,158,000

33,396,000

Gross Margin

4,530,000

4,668,000

4,601,000

12,138,000

Gross Operating Profit

4,530,000

4,668,000

4,601,000

12,138,000

Selling, Gen. & Administrative Expense

2,849,000

2,847,000

2,988,000

3,253,000

Operating Income

1,603,000

1,821,000

996,000

450,000

Operating Income b/f Depreciation (EBITDA)

1,681,000

1,821,000

1,613,000

8,885,000

Depreciation

7,544,000

Operating Income After Depreciation

1,681,000

1,821,000

1,613,000

1,341,000

Interest Income

318,000

139,000

(213,000)

Other Income, Net

418,000

300,000

680,000

572,000

Other Special Charges

(78,000)

(617,000)

(891,000)

Special Income/Charges

(78,000)

(617,000)

(891,000)

All numbers in thousands

Total Income Avail for Interest Expense (EBIT)

2,339,000

2,260,000

1,676,000

809,000

Interest Expense

128,000

118,000

110,000

135,000

Pre-tax Income (EBT)

2,211,000

2,142,000

1,566,000

674,000

Income Taxes

357,000

241,000

216,000

(73,000)

Minority Interest

21,000

55,000

35,000

22,000

Income before Income Taxes

1,793,000

1,842,000

1,143,000

165,000

Net Income from Continuing Operations

1,833,000

1,846,000

1,315,000

725,000

Net Income from Total Operations

1,833,000

1,846,000

1,315,000

725,000

Total Net Income

1,833,000

1,846,000

1,315,000

725,000

Normalized Income

1,911,000

1,846,000

1,932,000

1,616,000

Net Income Available for Common

1,476,000

1,846,000

1,004,000

472,000

Preferred Dividends

357,000

311,000

253,000

Income Statement - Year-to-Date

Revenues Year-to-Date

112,949,000

75,373,000

37,759,000

150,276,000

Income Year-to-Date fr. Total Ops.

4,994,000

3,161,000

1,315,000

9,190,000

* = Data not available

(Forbes, General Motors Company income statement, 2013).

Examining GM's income statements, it becomes clear that GM has experienced a dramatic increase in income from the first reporting period measured, which was at the end of 2011. This is true despite a different trend in overall revenues, reflecting a possible change in operations that has positively impacted efficiency and profitability.

Fortunately, Forbes has an income statement for Toyota as well, which allows direct comparison of the two companies across all measures contained within the income statement. Forbes' version of Toyota's income statement is as follows:

View: Annual Data | Quarterly Data

All numbers in thousands

PERIOD ENDING

12/2012

09/2012

06/2012

03/2012

Income Statement

Operating Revenue (Revenue/Sales)

61,857,087

69,639,340

68,950,657

58,399,703

Total Revenues

61,857,087

69,639,340

68,950,657

58,399,703

Cost of Sales

50,791,268

55,522,699

55,391,653

47,724,978

Cost of Sales with Depreciation

53,475,393

58,958,239

58,564,130

50,409,024

Gross Margin

11,065,819

14,080,247

13,559,004

10,674,724

Gross Operating Profit

11,065,819

14,116,641

13,559,004

10,674,724

Selling, Gen. & Administrative Expense

6,930,770

6,294,082

5,960,621

5,191,418

Operating Income

1,450,923

4,387,018

4,425,905

2,799,260

Operating Income b/f Depreciation (EBITDA)

4,135,048

7,822,558

7,598,383

5,483,305

Depreciation

2,684,124

3,435,540

3,172,477

2,684,045

Operating Income After Depreciation

1,450,923

4,387,018

4,425,905

2,799,260

Interest Income

348,167

255,706

434,089

177,381

Other Income, Net

476,039

(2,752,649)

(2,820,240)

(2,690,704)

All numbers in thousands

Total Income Avail for Interest Expense (EBIT)

2,275,130

1,890,075

2,039,754

285,936

Interest Expense

71,989

87,055

75,648

85,786

Pre-tax Income (EBT)

2,203,140

1,803,019

1,964,105

200,150

Income Taxes

783,315

(1,879,604)

(2,066,850)

(1,571,104)

Minority Interest

257,825

360,588

392,066

437,973

Income before Income Taxes

1,526,425

4,885,822

5,203,697

2,696,992

Net Income from Continuing Operations

1,419,825

3,322,035

3,638,889

1,333,280

Net Income from Total Operations

1,419,825

3,322,035

3,638,889

1,333,280

Total Net Income

1,161,999

3,322,035

3,638,889

1,333,280

Normalized Income

1,419,825

3,322,035

3,638,889

1,333,280

Net Income Available for Common

1,419,825

3,322,035

3,638,889

1,333,280

Income Statement - Year-to-Date

Revenues Year-to-Date

188,721,248

140,499,602

68,950,657

225,817,522

Income Year-to-Date fr. Total Ops.

8,485,608

7,061,704

3,638,889

3,445,640

* = Data not available

(Forbes, Toyota income statement, 2013).

Examining the income statements, Toyota's income fell from the previous three quarters, and the fall was somewhat substantial. Given that GM's net income did not demonstrate the same pattern, it does not appear to be the result of cyclical changes in the automotive sales cycle. In addition, Toyota's total revenue and net income appear to be more directly and positively correlated that GM's revenue and net income.

Balance Sheets

A company's balance sheet is another way of summarizing the company's financial health. A balance sheet is a "financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders" (Investopedia, Balance sheet, 2013). Balance sheets follow a basic formula, which is "Assets = Liabilities + Shareholders' Equity" (Investopedia, Balance sheet, 2013). Each side of the balance sheet should balance out, because assets either derive from incurring a liability or getting it from the company's equity (Investopedia, Balance sheet, 2013). "Each of the three segments of the balance sheet will have many accounts within it that document the value of each. Accounts such as cash, inventory and property are on the asset side of the balance sheet, while on the liability side there are accounts such as accounts payable or long-term debt" (Investopedia, Balance sheet, 2013).

Forbes makes the balance sheets of companies available on its website. GM's balance sheet is below:

View: Annual Data | Quarterly Data

All numbers in thousands

PERIOD ENDING

09/2012

06/2012

03/2012

12/2011

Balance Sheet - Assets

Cash and Equivalents

23,320,000

22,184,000

17,378,000

15,499,000

Restricted Cash

863,000

734,000

924,000

206,000

Marketable Securities

10,411,000

11,381,000

14,686,000

16,148,000

Accounts Receivable

13,015,000

11,117,000

12,485,000

9,949,000

Other Receivable

3,744,000

3,478,000

3,314,000

Receivables

16,759,000

14,595,000

15,799,000

9,949,000

Raw Materials

7,241,000

7,112,000

6,745,000

Work in Progress

6,486,000

Finished Goods

8,431,000

8,321,000

9,099,000

7,838,000

Inventories

15,672,000

15,433,000

15,844,000

14,324,000

Current Deferred Income Taxes

2,110,000

2,087,000

1,985,000

1,657,000

Other Current Assets

2,972,000

3,819,000

2,600,000

2,464,000

Total Current Assets

72,107,000

70,233,000

69,216,000

60,247,000

Land & Improvements

2,496,000

Building & Improvements

4,670,000

Machinery, Furniture & Equipment

17,324,000

Construction in Progress

3,068,000

Other Fixed Assets

26,578,000

25,026,000

24,275,000

Total Fixed Assets

26,578,000

25,026,000

24,275,000

27,558,000

Gross Fixed Assets (Plant, Prop. & Equip.)

26,578,000

25,026,000

24,275,000

27,558,000

Accumulated Depreciation & Depletion

4,601,000

Net Fixed Assets (Net PP&E)

26,578,000

25,026,000

24,275,000

22,957,000

Intangibles

8,904,000

9,192,000

9,687,000

10,013,000

Cost in Excess

28,408,000

28,405,000

28,433,000

29,019,000

Non-Current Deferred Income Taxes

2,778,000

3,151,000

3,411,000

2,900,000

Other Non-Current Assets

16,681,000

15,980,000

15,172,000

19,467,000

Total Non-Current Assets

83,349,000

81,754,000

80,978,000

84,356,000

Total Assets

155,456,000

151,987,000

150,194,000

144,603,000

Balance Sheet - Liabilities, Stockholders Equity

Accounts Payable

26,313,000

26,425,000

27,576,000

24,494,000

Short-Term Debt

6,278,000

5,092,000

5,350,000

1,682,000

Accrued Liabilities

25,032,000

25,134,000

23,651,000

22,756,000

Total Current Liabilities

57,623,000

56,651,000

56,577,000

48,932,000

Long-Term Debt

10,375,000

9,701,000

8,874,000

11,650,000

Deferred Income Taxes

12,757,000

12,735,000

12,754,000

12,336,000

Other Non-Current Liabilities

32,072,000

31,290,000

31,849,000

32,694,000

Minority Interest

970,000

910,000

884,000

871,000

Total Non-Current Liabilities

56,174,000

54,636,000

54,361,000

57,551,000

Total Liabilities

113,797,000

111,287,000

110,938,000

106,483,000

Preferred Stock Equity

10,391,000

10,391,000

10,391,000

10,391,000

Common Stock Equity

31,268,000

30,309,000

28,865,000

27,729,000

Common Par

16,000

16,000

16,000

16,000

Additional Paid in Capital

26,443,000

26,399,000

26,334,000

26,391,000

Retained Earnings

11,533,000

9,889,000

8,283,000

7,183,000

Other Equity Adjustments

(6,724,000)

(5,995,000)

(5,768,000)

(5,861,000)

Total Capitalization

52,034,000

50,401,000

48,130,000

49,770,000

Total Equity

41,659,000

40,700,000

39,256,000

38,120,000

Total Liabilities & Stock Equity

155,456,000

151,987,000

150,194,000

144,603,000

Cash Flow

12,342,000

12,592,000

13,270,000

15,129,000

Working Capital

14,484,000

13,582,000

12,639,000

11,315,000

Free Cash Flow

8,292,000

1,370,000

2,034,000

11,181,000

Invested Capital

52,034,000

50,401,000

48,130,000

49,770,000

* = Data not available

(Forbes, General Motors balance sheet, 2013).

Examining GM's balance sheet, several features stand out. First, GM has experienced a steady increase in assets over the last several reporting periods. Likewise, it has a significantly greater free cash flow than it had the previous two reporting periods. It has been able to continue to invest capital in the company. Finally, its equity has continued to grow over the last few reporting periods.

Toyota's balance sheet, also prepared by Forbes to aid in comparison across dimensions, is featured below:

View: Annual Data | Quarterly Data

All numbers in thousands

PERIOD ENDING

12/2012

09/2012

06/2012

03/2012

Balance Sheet - Assets

Cash and Equivalents

14,438,633

22,842,840

22,605,351

21,380,411

Marketable Securities

17,772,675

16,549,447

15,726,494

14,351,661

Accounts Receivable

18,236,608

21,813,251

22,190,099

24,300,710

Loans Receivable

54,954,449

53,746,465

51,686,652

50,001,786

Other Receivable

3,937,766

4,247,956

3,943,188

4,964,420

Receivables

77,128,825

79,807,673

77,819,939

79,266,917

Raw Materials

5,099,143

Work in Progress

2,685,898

Finished Goods

11,927,966

Other Inventories

18,885,108

20,141,323

20,376,024

Inventories

18,885,108

20,141,323

20,376,024

19,713,008

Prepaid Expenses

6,354,201

5,850,938

6,352,199

6,274,718

Current Deferred Income Taxes

7,929,450

8,552,943

8,863,616

8,733,057

Total Current Assets

142,508,895

153,745,167

151,743,627

149,719,776

Land & Improvements

14,818,434

15,913,187

15,529,540

15,107,369

Building & Improvements

43,617,269

46,918,239

45,561,549

44,485,229

Machinery, Furniture & Equipment

141,035,142

147,029,048

143,538,952

141,803,900

Construction in Progress

3,195,749

3,395,385

3,213,335

3,345,974

Total Fixed Assets

202,666,596

213,255,861

207,843,376

204,742,475

Gross Fixed Assets (Plant, Prop. & Equip.)

202,666,596

213,255,861

207,843,376

204,742,475

Accumulated Depreciation & Depletion

128,220,451

135,696,593

131,818,874

128,973,838

Net Fixed Assets (Net PP&E)

74,446,144

77,559,267

76,024,501

75,768,637

Other Non-Current Assets

157,031,347

155,593,791

148,592,004

146,963,922

Total Non-Current Assets

231,477,491

233,153,059

224,616,505

222,732,559

Total Assets

373,986,387

386,898,226

376,360,132

372,452,336

Balance Sheet - Liabilities, Stockholders Equity

Accounts Payable

26,771,923

31,545,411

32,858,378

34,894,902

Short-Term Debt

75,284,748

75,199,010

74,462,689

72,462,105

Accrued Liabilities

21,437,591

22,739,550

22,820,917

22,219,126

Other Current Liabilities

14,688,155

14,983,997

14,032,974

13,586,560

Total Current Liabilities

138,182,419

144,467,969

144,174,959

143,162,695

Long-Term Debt

74,706,516

75,511,452

72,505,940

73,422,164

Deferred Income Taxes

11,981,156

11,208,830

10,956,748

11,044,206

Other Non-Current Liabilities

11,696,756

10,912,107

10,514,776

10,349,996

Minority Interest

6,444,997

6,765,796

6,483,707

6,272,762

Total Non-Current Liabilities

104,829,427

104,398,187

100,461,173

101,089,130

Total Liabilities

243,011,846

248,866,156

244,636,132

244,251,825

Common Stock Equity

130,974,540

138,032,069

131,724,000

128,200,510

Common Par

4,824,715

Additional Paid in Capital

11,031,299

12,177,172

11,897,831

6,691,172

Retained Earnings

143,923,999

159,001,760

151,803,697

144,809,210

Treasury Stock

(13,205,272)

(14,597,570)

(14,233,500)

(13,800,109)

Other Equity Adjustments

(10,775,486)

(18,549,293)

(17,744,028)

(14,324,479)

Total Capitalization

205,681,057

213,543,521

204,229,941

201,622,674

Total Equity

130,974,540

138,032,069

131,724,000

128,200,510

Total Liabilities & Stock Equity

373,986,387

386,898,226

376,360,132

372,452,336

Cash Flow

21,578,061

22,142,188

20,043,145

16,421,277

Working Capital

4,326,476

9,277,197

7,568,667

6,557,081

Free Cash Flow

2,484,342

3,881,940

2,113,598

(2,872,981)

Invested Capital

205,681,057

213,543,521

204,229,941

201,622,674

* = Data not available

(Forbes, Toyota balance sheet, 2013).

Examining Toyota's balance sheet, several features stand out. First, Toyota appears to have experienced a steady decline in assets over the last several reporting periods. However, its free cash flow is much higher than it was in the initial reporting period. It has been able to continue to invest capital in the company. Finally, its equity has remained fairly consistent over the last several reporting periods.

Statement of Funds

A statement of funds is also referred to as a cash flow statement. A cash flow statement is "One of the quarterly financial reports any publicly traded company is required to disclose to the SEC and the public. The document provides aggregate data regarding all cash inflows a company receives from both its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments during a given quarter" (Investopedia, Cash flow statement, 2013). In many ways, a statement of funds does not provide significant information to a potential investor about a company's financial health. "Because public companies tend to use accrual accounting, the income statements they release each quarter may not necessarily reflect changes in their cash positions. For example, if a company lands a major contract, this contract would be recognized as revenue (and therefore income), but the company may not yet actually receive the cash from the contract until a later date" (Investopedia, Cash flow statement, 2013). Therefore, it is important to keep in mind the limitations of a statement of funds when using it to examine a company's financial health.

Forbes makes the cash flow statements of companies available on its website. GM's cash flow statement is below:

View: Annual Data | Quarterly Data

All numbers in thousands