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The indebtedness of a company can be a brake on the implementation of new innovations and investment in growth. That is why we will assess the state of the debt and to what extent it can slow down development. General Motors Company (NYSE: GM) is currently in the process of developing its cloud system that will provide over-the-air updates, and its new commitment to electric vehicles will require a lot of funding.
When is debt dangerous?
Debt becomes a fixed obligation that helps a business in the good times – high profit – and hinders it in the bad times – when profit and growth are lacking.
Currently, GM has $ 130 billion in revenue over the past 12 months and $ 10.9 billion in profits. However, the company has had negative free cash flow for some time and currently sits at US $ 12.7 billion FCF.
This significantly hinders their ability to repay their debts, and the expansion will be difficult to finance. Rating agency Fitch has also confirmed GM’s long-term-BBB issuer default ratings with a stable outlook that is unlikely to change until the macroeconomic situation stabilizes. It’s quite low on the rating scale, which puts the company at significant risk.
Considering the revenue growth, even though the company plans to double its revenues over the next decade, given that their revenues are declining and stable with a high of US $ 156 billion since 2015, we can recognize that their vision is easier said than done, and execution will be key.
Check out our latest analysis for General Motors
How much debt is General Motors?
You can click on the graph below for historical numbers, but it shows General Motors had $ 108.6 billion in debt in September 2021, down from $ 117.2 billion a year earlier.
However, it has US $ 19.0 billion in cash offsetting this, which leads to net debt of around US $ 89.6 billion.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
As it turns out, General Motors has a rather worrying net debt to EBITDA ratio of 5.0 but very strong interest coverage of 14.7.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. We therefore always check how much of this EBIT is converted into free cash flow. As mentioned, ot over the past three years, General Motors has experienced substantial total negative free cash flow. While this may be the result of spending for growth, it makes debt much riskier.
Conclusion
GM sees a bold future, and it has to be funded one way or another. Currently, it may be more difficult for the company to take on more debt to finance new projects such as the production of electric vehicles.
With this, we see that investors need a bit of caution when evaluating the company’s bold growth plans, as the significant debt burden may lie between what GM wants to be and what could end up happening.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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Simply Wall St analyst Goran Damchevski and Simply Wall St have no positions in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents.
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