FIN 6060 Module 5 Assignment

GM Pro Forma Statements
Nexford University
FIN 6060: Financial Decision Making
Prof. Keith Wade
December 8, 2023
1
Introduction
In this analysis, we delve into the financial landscape of General Motors Company
(GM). With a legacy spanning over a century, GM has been a driving force behind
automotive innovation and development (Hughes, 2019). This examination focuses on GM's
recent financial statements and pro forma projections to evaluate the feasibility of its
proposed expansion, offering insights crucial to strategic decision-making in a dynamic
market.
Pro Forma Financial Statements
Pro Forma Income Statement

2017 (Actual) ($ million) Pro Forma 2018 ($ million)
Net Sales and Revenue 145,588.00 160,146.80
Costs and Expenses
Automotive Cost of Sales 114,869.00 126,355.90
GM Financial Expenses 11,128.00 12,240.80
Automotive S,G&A Expense 9,575.00 10,532.50
Total Costs and Expenses 135,572.00 149,129.20
Operating Income 10,016.00 11,017.60
Automotive Interest Expense 575.00 632.50
Interest Income and Other 290.00 319.00
Equity Income 2,132.00 2,345.20
Income Before Income Taxes 11,863.00 13,349.30
Income Tax Expense 11,533.00 12,897.80
Income from Continuing Operations 330.00 1,451.50
Income from Discontinued Operations (4,212.00) (4,633.20)
Net Income (3,882.00) (3,181.70)
Pro Forma Balance Sheet

December 31, 2017 (Actual) Pro Forma December 31, 2018
($ million) ($ million)
Current Assets
Cash and Cash Equivalents 15,512.00 16,413.20
Marketable Securities 8,313.00 8,744.70
Receivables (net) 8,164.00 8,572.40
GM Financial Receivables (net) 20,521.00 21,547.10
2
Inventories 10,663.00 11,729.30

Other Current Assets 4,465.00 4,911.50
Total Current Assets 68,744.00 71,918.20
Non-current Assets
GM Financial Receivables (net) 21,208.00 22,268.80
Equity in Net Assets of Affiliates 9,073.00 9,526.30
Property (net) 36,253.00 37,917.50
Goodwill and Intangible Assets (net) 5,849.00 6,130.70
Equipment on Operating Leases (net) 42,882.00 44,976.20
Deferred Income Taxes 23,544.00 24,721.20
Other Assets 4,929.00 5,175.90
Total Non-current Assets 143,738.00 150,716.70
Total Assets 212,482.00 222,634.90
Pro Forma Cash Flow Statement

2017 (Actual) ($ million) Pro Forma 2018 ($ million)
Operating Activities
Net Cash Provided by Operating Activities - Continuing
Operations 17,338.00 19,071.80
Net Cash Used in Operating Activities - Discontinued
Operations (10.00) (11.00)
Net Cash Provided by Operating Activities 17,328.00 19,060.80
Investing Activities
Net Cash Used in Investing Activities - Continuing Operations (24,072.00) (26,479.20)
Net Cash Used in Investing Activities - Discontinued
Operations (3,500.00) (3,850.00)
Net Cash Used in Investing Activities (27,572.00) (30,329.20)
Financing Activities
Net Cash Provided by Financing Activities - Continuing
Operations 12,410.00 13,651.00
Net Cash Provided by Financing Activities - Discontinued
Operations 174.00 191.40
Net Cash Provided by Financing Activities 12,584.00 13,842.40
Effect of Exchange Rate Changes on Cash 348.00 382.80
Net Increase (Decrease) in Cash, Cash Equivalents, and
Restricted Cash 2,688.00 2,956.00
Cash, Cash Equivalents, and Restricted Cash - Continuing
Operations at End of Period 17,848.00 18,648.00
Cash, Cash Equivalents, and Restricted Cash - Discontinued
Operations at End of Period 0.00 0.00
Ratio Analysis
3
Liquidity Ratios
1. Current Ratio:
Current Ratio = Current Assets ÷ Current Liabilities
Current Ratio = 71,918.2 ÷ 85,181 = 0.844
2. Quick Ratio:
Quick Ratio = (Current Assets - Inventories) ÷ Current Liabilities
Quick Ratio = (71,918.2 - 11,729.3) ÷ 85,181= 0.616
Profitability Ratios
3. Net Profit Margin:
Net Profit Margin = (Net Income ÷ Sales Revenue) x 100
Net Profit Margin = (-3,181.7 ÷ 160,146.8) x 100 = -1.988
4. Return on Assets (ROA):
ROA = Net Income ÷ Average Total Assets
Average Total Assets = (212,482 + 233,730.2) ÷ 2
ROA = (-3,181.7 ÷ 223,106.1) = -0.014
Solvency Ratios
5. Debt-to-Equity Ratio:
Debt-to-Equity Ratio = Total Debt ÷ Total Equity
Debt-to-Equity Ratio = (85,181 + 92,434) ÷ 36,200 = 4.69
6. Interest Coverage Ratio:
Interest Coverage Ratio = EBIT ÷ Interest Expense
Interest Coverage Ratio = 11,017.6 ÷ 632.5 = 17.411
Efficiency Ratios
7. Asset Turnover:
Asset Turnover = Sales Revenue ÷ Average Total Assets

4
Asset Turnover = 160,146.8 ÷ 223,106.1 = 0.717
8. Inventory Turnover:
Inventory Turnover = Cost of Goods Sold ÷ Average Inventory
Inventory Turnover = (126,355.9) ÷ (11,729.3 + 10,663) ÷ 2 = 11.314
Justification and Recommendation
Based on the pro forma financial statements and the provided assumptions, here are
some considerations:
Pros of Expansion
1. Sales Revenue Increase: The pro forma statements suggest a 10% increase in sales
revenue, which could lead to higher profits and improved financial performance.
2. Asset Growth: The expansion is supported by a proportional increase in assets, indicating
that the company is gearing up to meet the demands of higher sales.
3. Cash Flow: The pro forma cash flow statement shows a positive net cash provided by
operating activities, indicating that the company expects to generate sufficient cash to cover
its operational needs (Tuovila, 2023).
Cons and Risks
1. Net Profit Margin and ROA: The negative net profit margin and return on assets (ROA)
percentages indicate potential profitability and efficiency challenges (AL Ani & Chavali,
2023) from the pro forma analysis. It is crucial to understand the underlying reasons for these
negative values.
2. Debt-to-Equity Ratio: The debt-to-equity ratio is relatively high (4.69). While this may be
common in the automotive industry, it signifies a higher reliance on debt. An increase in debt
could lead to increased financial risk (Mathur, 2023).

5
3. Economic and Market Risks: The automotive industry is sensitive to economic conditions,
consumer preferences, and technological changes. External factors like economic downturns,
regulatory changes, or shifts in consumer demand could impact the success of the expansion.
Recommendation
Based on the presented information, it is recommended that GM proceed with caution
regarding the expansion. Here are key considerations:
1. Investigate Negative Margins and ROA: GM should conduct a detailed analysis to
understand why the net profit margin and ROA are negative before proceeding with the
expansion (McClure, 2021). Addressing underlying issues is crucial for sustainable growth.
2. Monitor Debt Levels: Given the high debt-to-equity ratio, GM should carefully manage
its debt levels. Exploring strategies to optimize the capital structure might be advisable,
potentially considering equity financing to reduce reliance on debt (Bui et al., 2023).
3. Risk Mitigation Strategies: Develop and implement risk mitigation strategies to address
potential challenges like economic downturns or regulation changes.
4. Regular Performance Monitoring: Establish key performance indicators (KPIs) and
regularly monitor actual performance against pro forma projections. This will allow for
timely adjustments and strategic decision-making.
In conclusion, the analysis of General Motors (GM) indicates potential for growth in
sales revenue and assets yet raises concerns over negative profitability indicators and a high
debt-to-equity ratio. The cautious recommendation suggests addressing challenges before
proceeding with the proposed expansion. This comprehensive examination equips GM with
strategic insights to navigate the dynamic automotive industry, emphasizing the importance
of proactive financial management for sustained success.

6
References
AL Ani, M. K., & Chavali, K. (2023, February 27). The relationship between investment
intensity and profitability measures from the perspective of foreign investors.
Humanities and Social Sciences Communications, 10(1).
https://doi.org/10.1057/s41599-023-01571-8
Bui, T. N., Nguyen, X. H., & Pham, K. T. (2023, August 4). The Effect of Capital Structure
on Firm Value: A Study of Companies Listed on the Vietnamese Stock Market.
International Journal of Financial Studies, 11(3), 100.
https://doi.org/10.3390/ijfs11030100
Hughes, D. (2019, September 25). General Motors: A Resurgent American Brand. Digital
Marketing Institute. https://digitalmarketinginstitute.com/blog/general-motors-a-
great-american-brand
Mathur, S. (2023, November 8). Debt to Equity (DE) Ratio: Meaning, Formula, Calculation,
Interpretation, Example. Smallcase. https://www.smallcase.com/learn/debt-to-
equity-ratio/
McClure, B. (2021, December 29). How to Use ROA to Judge a Company's Financial
Performance. Investopedia.
https://www.investopedia.com/articles/fundamental/04/012804.asp
Tuovila, A. (2023, July 8). Operating Cash Flow (OCF): Definition, Cash Flow Statements.
Investopedia. https://www.investopedia.com/terms/o/operatingcashflow.asp

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GM Pro Forma Statements

FIN 6060: Financial Decision Making

Prof. Keith Wade

proposed expansion, offering insights crucial to strategic decision-making in a dynamic

Pro Forma Financial Statements

Pro Forma Income Statement

Pro Forma Balance Sheet

Inventories 10,663.00 11,729.30

Pro Forma Cash Flow Statement

Current Ratio = Current Assets ÷ Current Liabilities

Current Ratio = 71,918.2 ÷ 85,181 = 0.844

Quick Ratio = (Current Assets - Inventories) ÷ Current Liabilities

Quick Ratio = (71,918.2 - 11,729.3) ÷ 85,181= 0.616

3. Net Profit Margin:

Net Profit Margin = (Net Income ÷ Sales Revenue) x 100

Net Profit Margin = (-3,181.7 ÷ 160,146.8) x 100 = -1.988

4. Return on Assets (ROA):

ROA = Net Income ÷ Average Total Assets

Average Total Assets = (212,482 + 233,730.2) ÷ 2

ROA = (-3,181.7 ÷ 223,106.1) = -0.014

Debt-to-Equity Ratio = Total Debt ÷ Total Equity

Debt-to-Equity Ratio = (85,181 + 92,434) ÷ 36,200 = 4.69

6. Interest Coverage Ratio:

Interest Coverage Ratio = EBIT ÷ Interest Expense

Interest Coverage Ratio = 11,017.6 ÷ 632.5 = 17.411

Asset Turnover = Sales Revenue ÷ Average Total Assets

Asset Turnover = 160,146.8 ÷ 223,106.1 = 0.717

Inventory Turnover = Cost of Goods Sold ÷ Average Inventory

Inventory Turnover = (126,355.9) ÷ (11,729.3 + 10,663) ÷ 2 = 11.314

Justification and Recommendation

2. Asset Growth: The expansion is supported by a proportional increase in assets, indicating

that the company is gearing up to meet the demands of higher sales.

its operational needs (Tuovila, 2023).

Cons and Risks

could lead to increased financial risk (Mathur, 2023).

Based on the presented information, it is recommended that GM proceed with caution

regarding the expansion. Here are key considerations:

1. Investigate Negative Margins and ROA: GM should conduct a detailed analysis to

potential challenges like economic downturns or regulation changes.

4. Regular Performance Monitoring: Establish key performance indicators (KPIs) and

timely adjustments and strategic decision-making.

debt-to-equity ratio. The cautious recommendation suggests addressing challenges before

of proactive financial management for sustained success.

intensity and profitability measures from the perspective of foreign investors.

Humanities and Social Sciences Communications, 10(1).

on Firm Value: A Study of Companies Listed on the Vietnamese Stock Market.

International Journal of Financial Studies, 11(3), 100.

Marketing Institute. https://digitalmarketinginstitute.com/blog/general-motors-a-

Interpretation, Example. Smallcase. https://www.smallcase.com/learn/debt-to-

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