This paper compares the financial performance of General Motors (GM) and Honda Motor Company (HMC) using key financial ratios drawn from their 2011–2012 financial statements. The analysis examines debt-to-equity ratios, gross profit margins, and current ratios to identify structural and strategic weaknesses contributing to GM's underperformance relative to Honda. Beyond the numbers, the paper considers management decisions, business focus, and product innovation as additional factors shaping each company's competitive position. The findings suggest that GM's heavy reliance on debt, lower operating efficiency, and leadership continuity following its government bailout collectively hampered its recovery and long-term market share.
This paper compares the finances of General Motors (GM) to those of Honda Motor Company (HMC) in an attempt to determine why the latter has been more successful than the former. In doing so, it utilizes a number of financial management concepts and measures of performance, including financial ratios and an assessment of managerial capabilities.
Although GM's declining stock price represents an immediate concern, the company's second-quarter earnings were equally unimpressive. According to Mespell (2012), GM's "second quarter earnings plunged by nearly half." The company's market share has also been on a downward trend.
GM's lagging performance can be attributed to a number of factors. To begin with, the number of new models the company has introduced in recent times is relatively low compared to some of its competitors, meaning the company has done little to excite buyers on this front. Additionally, GM has been reluctant to embrace a new management team. Even after the government bailout, GM chose to retain a significant number of its former executives in top management positions, with the outgoing chairman being replaced by his vice-chairman. This did little to turn around the company's fortunes.
Honda's decision to appoint a chief executive with a research background may have worked to its advantage. Prior to being appointed Honda's CEO, Mr. Takanobu served in the same company as its R&D director (Business Week, 2012). This has helped Honda focus more on product innovation than many of its peers, drawing more potential buyers into its showrooms.
It is also important to note that GM's lack of business focus could have significantly destabilized its market share over the long term. In the opinion of More (2009), the net cash flows of "highly market-focused competitors like Toyota and Honda" were largely solid at the time GM was experiencing financial challenges. Indeed, according to More, this was the main reason for GM's failure. The company may take considerable time to recover from this strategic misstep.
A look at selected financial ratios for GM and Honda further highlights some of GM's weaknesses. The ratio computations below are based on financial statements for the year ended December 30, 2011 (General Motors) and March 30, 2012 (Honda), with figures expressed in thousands.
Table 1: Selected Financial Ratios — General Motors vs. Honda
Debt-to-Equity Ratio (Total Debt / Total Equity)
GM: 106,483,000 / 38,120,000 = 2.79
Honda: 89,655,000 / 53,498,000 = 1.68
Gross Profit Margin ((Sales − COGS) / Sales)
GM: 19,047,000 / 131,229,000 = 0.15
Honda: 24,649,000 / 71,932,000 = 0.34
Current Ratio (Current Assets / Current Liabilities)
GM: 60,247,000 / 48,932,000 = 1.23
Honda: 57,587,000 / 43,499,000 = 1.32
The debt-to-equity ratio, according to Albrecht, Stice, and Stice (2010), is "the number of dollars of borrowed funds for every dollar invested by owners." Looking at the two companies' debt-to-equity ratios, it is clear that General Motors has been more aggressive than Honda in the utilization of debt to finance its growth. This could make GM's earnings more volatile going forward.
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