Financial Analysis: How to Do It Right

Assess the size and growth aspects of each company based on the following financial statement related items 

Size 

total assets and total revenue 

When the two companies are compared in terms of total assets and total revenue, it is clear that General Motors is a larger company than Tesla on both counts. For instance, General Motor’s total assets were valued (in millions) at $235,194 in 2020 and $228,037 the year before. By comparison, Tesla’s total assets were valued (in millions) at $52,148 in 2020 and $34,309 the year before. The same conclusion is made when the two firms are compared in terms of their total revenues. For instance, Tesla’s total revenues (in millions) were $31,536 in 2020 and $24,578 in the year before. By comparison, General Motor’s total revenues (in millions) were $122,485 in 2020 and $137,237 in the year before. 

market cap 

In contrast, a comparison of the two firm’s market capitalization shows the opposite result. According to Yahoo Finance (2021a), Tesla’s market capitalization is $620.6 billion. By comparison, General Motor’s market capitalization is $80.45 billion (Yahoo Finance, 2021b. This shows that in terms of market capitalization, Tesla is in the lead, while General Motors is the larger firm in terms of total assets and total revenue 

Growth 

asset growth and revenue growth 

In terms of asset growth, statistics show that Tesla acquired most assets between 2019 and 2020. In other words, Tesla’s total assets (in millions) were $52,148 in 2020, a 52% growth from $34,309 in 2019. By comparison, General Motors grew by 3.14% in the same time period. When the comparison was made in terms of revenue growth, the same trend is observed. In other words, between 2018 and 2020, Tesla has managed to grow its revenue by 14.5% (2018 to 2019) and 28.3% (2019 to 2020). In comparison, General Motors has experienced a corresponding drop in revenues in the same time period by 6.67% between 2018 and 2019 and 10.75% between 2019 and 2020. 

market to book ratio 

As of July 2021, General Motor’s market to book ratio was 1.48. By comparison, Tesla’s market to book ratio was 26.01. The figure below shows the two company’s market to book ratios in the period between 2012 and 2020 

Figure 1 . Tesla's Price to Book Ratio (Source: Macrotrends, 2021a) 

Figure 2 . General Motor's Price to Book Ratio (Source: Macrotrends, 2021b) 

From the historical trends, it is clear that General Motor’s market to book ratio has never exceeded 2 while Tesla’s market to book ratio rarely goes below 1. 

price to earnings ratio (P/E ratio) 

As of July 2021, General Motor’s P/E ratio was 8.974, compared to Tesla’s P/E ratio 644.22 in the same month. Note that a better comparison can be made the two company’s P/E ratios are compared over a long period of time. The figures below show such a trend. 

Figure 3 . General Motor's P/E Ratio. Source: Ycharts (2021a) 

Figure 4 . Tesla's P/E Ratio. Source: Ycharts (2021b) 

From figures 3 and 4 above, different trends can be observed. For instance, General Motor’s P/E ratio has systematically been dropping every three months, and the drop has been dramatic. By comparison, there is no general trend to Tesla’s P/E ratio, except for April 2021 when the value dropped dramatically and never recovered to its previous high values. Another trend to be observed is that within the same time period, General Motor’s P/E ratio has never exceeded 30 while Tesla’s ratio has never exceeded 1500. 

Use following ratios or financial statemen item to compare and analyze business performance. 

Profitability 

gross profit percentage (LO 5.6) 

Gross profit percentage is determined by the ratio between gross profits and net sales. If the gross profit percentage constantly fluctuates, it is a sign of poor management or inferior product range. Note that such fluctuations are acceptable when the company makes significant changes to its business model. The figures below show the trends in the gross profit percentage for Tesla and General Motors. 

Figure 5 . Tesla Gross Profit Percentage. Source: Ycharts (2021c) 

Figure 6 . General Motors Gross Profit Percentage. Source: Ycharts (2021d) 

From the above two figures, it is clear that Telsa has a higher gross profit percentage than General Motors (21.32% compared to 9.31% in 2021). By comparison, General Motor’s gross profit percentage between 2018 and 2020 had little fluctuations compared to Tesla’s, signaling wither of the causative factors described above. 

return on assets (LO 1.6) 

Return on assets is the ratio between the net income and average total assets. The ratio quantifies how profitability the firm is compared to its total assets. It is also a good indicator of how skilled the management is in using current assets to generate revenues. From the financial data provided, General Motor’s return on assets in 2020 was 2.7%, a decrease from 2.92% in the previous year. By comparison, Tesla’s return on assets in 2020 was 1.65%, a decrease from 2.25% in the previous year. When the two are compared, it is clear that General Motors is more efficient at using its assets to generate income. 

return on common stockholders’ equity, earnings per share, and the price/earnings ratio (LO 13.7) 

Return on equity divides the company’s net income by shareholder’s equity. Since shareholder’s equity is the difference between the firm’s assets minus debt, the ratio quantifies the firm’s profitability relative to stockholder’s equity. In 2020, General Motors’ return on equity was 3.34%, a significant increase from -13.53% in the previous year. By comparison, Tesla’s return on equity in 2020 was -1.8%, an increase from-18% in the previous year. 

Solvency 

debt ratio (LO 2.5) 

The debt ratio is a quick measure of a firm’s leverage. It is determined by the ratio of the company’s total debt or liabilities to its total assets. Any company with a debt ratio of 1 shows that it is funded more by its debts than assets. As a result, the company is at a higher risk of defaulting on its loans should the interest rates increase. As a result, the smaller the debt ratio, the better the company’s solvency as it will be funded more on assets than its current liabilities. From the financial data provided, it is clear that slightly half of Tesla’s operations were funded by debt (51.5%) in 2020. This is a clear improvement from the year before where three quarters of the firm’s operations were funded by debt (76.4%). By comparison, General Motors had a better debt ratio of 44.9% in 2020. It also had a bigger improvement compared to Tesla as its debt ratio in 2019 was 79.8%. 

debt to equity (12.6) 

the debt to equity ratio evaluates a company’s financial leverage by dividing its current liabilities by the total equity. In corporate finance, the debt to equity ratio quantifies how much of a firm’s operations are funded by debt compared to whole funds owned by the shareholders. From a different perspective, the ratio reflects the percentage of all current liabilities a shareholder covers. It should be noted that a higher debt to equity ratio denotes a less desirable position due to the increased risk. From the financial data provided, General Motor’s 2020 debt to equity ratio was 3.73, a slight drop from 3.96 from the year before. While the number is relatively high, it shows that General Motors has been aggressive with its financing, especially since they are depending more on debts to finance its operations. By comparison, Tesla’s 2020 debt to equity ratio was 1.28, a significant drop from 3.96 in the previous year. When the two companies are compared, it is clear that Tesla is at a lower risk than General Motors. After all, in 2019, the two companies share the same debt to equity ratio. However, Tesla either reduced its debt, raised more equity, or both in the following year as its debt to equity ratio dropped significantly in the following year. 

free cash flows 

Free cash flow is the amount of cash a firm is left with (generates) after all cash outflows have been accounted for. Some of these cash outflows either go to support continued operations or maintain the capital assets. In a nutshell, free cash flow is the amount of cash left after paying all operating expenses and capital expenditures. Free cash flow is an important metric that evaluates a firm’s cash generating ability. From the provided financial data, it can be determined that General Motor’s free cash flow (in millions) in 2020 was $10,701, approximately twice the amount from the previous year. By comparison, Tesla’s free cash flow (in millions) in 2020 was $5,943, approximately twice the amount from the previous year. It can, therefore, be concluded that though General Motors is better at generating cash (due to its higher free cash flow), both firms have doubled their free cash flows between 2019 and 2020. 

Liquidity 

current ratio (LO 4.6) 

Current ratio is the ratio between a company’s current assets and its current liabilities. The current ratio is a measure of a company’s ability to meet its short-term obligations. When the current ratio is 1 or lower, the company will experience liquidity problems. From the financial data provided on Tesla and General Motors, Tesla’s current ratio was 1.83 in 2020, an improvement from 1.3 in 2019. The value shows that at the time, Tesla was healthy and able to meet its short-term obligations. By comparison, General Motors current ratio was 1.27 in 2020, an improvement from 1.25 in 2019. Both companies are considered to be healthy. However, Tesla has a higher current ratio. Therefore, despite the differences in the magnitude of the two company’s current assets and liabilities, it can be concluded that Tesla is more liquid than General Motors. 

acid-test ratio (LO 8.5) 

Similar to the current ratio, the quick ratio measures a firm’s short-term liquidity. Unlike the current ratio, however, the quick ratio determines a firm’s ability to use its near-cash assets (those that are easily and quickly convertible into cash) to meet its current liabilities. A higher quick ratio is desirable as it demonstrates that the company is more liquid compared to a lower value. After all, a company with liquidity issues will find it difficult to pay its debts. According to Macrotrends (2021c), General Motor’s quick ratio was 0.99 in December 2020. This is slightly below the minimum desirable value of 1, which tells that the company has just enough assets that can be liquidated instantly to pay any of its current liabilities. In the same time period, Tesla’s quick ratio was 1.59 (Macrotrends, 2021d). This indicates that the company has $1.59 of liquid assets readily available to cover $1 of its current liabilities. Based on the current and quick ratio, it can be concluded that Tesla’s liquidity is significantly better than General Motors’. 

Operating Efficiency 

In 2020, Tesla’s inventory turnover was 6.07. The accounts receivable turnover ratio was 16.72 and the day’s sales in receivables was 21.83. Lastly, its asset turnover ratio was 0.6. By comparison, General Motor’s inventory turnover was 2.27 in 2020, its accounts receivable turnover ratio was 0.96, the day’s sales in receivables was 93.42, and its asset turnover ratio was 0.14. 

Conclusion 

In the automotive industry, General Motors and Tesla are among the biggest brands. Though their product ranges are for different market segments, a comparison of the two can give a bigger picture of how the different companies have managed to occupy their respective market shares. For instance, when it comes to electric vehicles with autonomous capabilities, Tesla’s cars are unrivalled. On the other hand, General Motors manufactures and sells cars worldwide under different successful brands like GMC, Chevrolet, and Buick. If a decision to buy the stock for either company should be made, different recommendations are needed. After all, both companies have a well-established brand reputation. Secondly, while General Motors has an extensive product diversity, on account for how long it has existed, Tesla is one of the most innovative companies to dominate different emerging markets in the automotive industry. 

Based on growth, Tesla stocks are recommended primarily because the company is relatively young and growing. As a result, it has yet to hit a cap on its best performance. Financial data also shows that the company has been growing their assets, giving them very high market to book and price to earnings ratios. Furthermore, the company’s return on assets and common stockholder’s equity showed the biggest change from the previous year. 

Based on solvency and liquidity, General Motors stocks are recommended. The financial reports show that the company’s debt ratio is rapidly dropping, probably due to good management practices as evidenced by its return on assets ratio. The company’s free cash flows are approximately twice those of Tesla, signaling a stronger ability to generate cash. Lastly, General Motor’s current ratio shows that it is healthy enough to meet its short-term obligations without liquidating a significant amount of its highly-solvent assets. 

Both stocks were recommended because the market is continuing to change, especially with the short and long-term consequences of the ongoing pandemic. There are numerous emerging opportunities and both companies have a record history of creativity and innovation when put under pressure. After all, to survive, remain competitive, and succeed, companies should continuously innovate and adapt to market demands as quickly and easily as possible. 

References 

Macrotrends. (2021a).  Tesla Price to Book Ratio 2009-2021 | TSLA . Macrotrends.net. Retrieved from https://www.macrotrends.net/stocks/charts/TSLA/tesla/price-book. 

Macrotrends. (2021b).  General Motors Price to Book Ratio 2009-2021 | TSLA . Macrotrends.net. Retrieved from https://www.macrotrends.net/stocks/charts/GM/general-motors/price-book. 

Macrotrends. (2021c).  Tesla Quick Ratio 2009-2021 | TSLA . Macrotrends.net. Retrieved from https://www.macrotrends.net/stocks/charts/TSLA/tesla/quick-ratio. 

Macrotrends. (2021d).  General Motors Quick Book Ratio 2009-2021 | TSLA . Macrotrends.net. Retrieved from https://www.macrotrends.net/stocks/charts/GM/general-motors/quick-ratio. 

Yahoo Finance. (2021a).  Yahoo is now a part of Verizon Media . Finance.yahoo.com. Retrieved from https://finance.yahoo.com/quote/GM/key-statistics?p=GM. 

Yahoo Finance. (2021b).  Yahoo is now a part of Verizon Media . Finance.yahoo.com. Retrieved from https://finance.yahoo.com/quote/TSLA/key-statistics?p=TSLA. 

Ycharts. (2021a).  General Motors PE Ratio | GM . Ycharts.com. Retrieved from https://ycharts.com/companies/GM/pe_ratio. 

Ycharts. (2021b).  Tesla PE Ratio | GM . Ycharts.com. Retrieved from https://ycharts.com/companies/TSLA/pe_ratio. 

Ycharts. (2021c).  General Motors Profit Margin (Quarterly) . Ycharts.com. Retrieved from https://ycharts.com/companies/GM/profit_margin. 

Ycharts. (2021d).  Tesla Profit Margin (Quarterly) . Ycharts.com. Retrieved from https://ycharts.com/companies/TSLA/gross_profit_margin.