Introduction

General Motors Company is a leading American multinational automotive manufacturing corporation having its headquarters in Detroit, United States. It operates manufacturing plants in over 8 countries. General Motors is engaged in manufacturing, designing, and selling cars, automobile parts and trucks. Also, it offers automotive financing services via General Motors financial corporation (Liu, 2020). The vision of the company is to make a globe with Zero Emissions, Zero crashes and Zero congestion. The stock of General Motors is listed on New York Stock Exchange and its ticker symbol is GM (Weiss, 2021). It sells off vehicles under the Baojun, Cadillac, Holden, GMC, Buick, Maven, OnStar, Jeifang and Wuling brands.

Tesla is also an American multinational automotive and clean energy corporation having its head office in Austin, Texas. It produces and design electric vehicles, battery energy storage from house to grid level, solar rooftop tiles and solar panels and associated goods and facilities. Its mission is to speed up the transition of the world towards sustainable energy (Subramanian, 2023). With the rise in global temperatures, it becomes essential to free the world from fossil fuel reliance and accomplish a zero-emission future. Its stock is traded on NASDAQ with the ticker symbol TSLA. The company via its subsidiary company named Tesla Energy, the corporation progresses and is the main installer of photovoltaic structures in the US (Daylan, 2023).

The main purpose of the assignment is to analyze the financial performance and position of General Motors and Tesla with the help of ratio analysis and provide a recommendation to the CEO regarding in which company, it must invest its surplus cash of £1000000.

Financial Ratio Analysis

Ratio analysis undertakes the comparison of the line-item data from the financial reports of the corporation to disclose insights in relation to liquidity, viability, solvency and operational competence. It is crucial in comparing the performance of one company to other carrying out operations within the same sector or industry (Amir et al., 2020). Stakeholders tend to make use of financial ratios for competitor analysis, benchmarking, market valuation and performance management. Analysts and investors make use of ratio analysis to assess the financial well-being of the companies by examining past and present financial statements. Relative data can depict how the corporation is acting over time and can be cast off to project likely future performance.

Current ratio – This ratio measures how the current assets of the company like cash, accounts receivables, inventories, etc. are used to settle the current debts such as trade payables. It is a type of liquidity ratio helpful in measuring the performance of working capital (Husna & Satria, 2019). This ratio is selected as it tells the capacity of the company to meet short-term financial obligations and commitments and acts as a vital indicator of financial health. By analyzing this ratio, one can realize if the corporation has assets to cover the long-term debts or if the cash flow is sufficient to cover the overall expenses. The current ratio of General Motors has somewhat improved from 1.01 in 2020 to 1.10 in 2021 and in the case of Tesla, it reduced from 1.88 to 1.38 in 2021 (General Motors annual report: Tesla Annual report, 2021). This signifies that the liquidity position of both companies is effective as they have enough amount of current assets to pay off their short-term financial obligations (Yanto et al., 2021). However, when the current ratio of both companies is compared, it can be claimed that Tesla is better in terms of liquidity as, for every $1 of current liabilities, it has $1.38 of current assets.

Net profit margin ratio – This ratio tells how much profit that company has made after making the payment of all the expenses such as cost of goods sold, rent, interest expenses, administrative and selling expenses, etc. in comparison to net sales (Affandi et al., 2019). This ratio is chosen as it expresses how much the company has produced profits with the help of available resources over the specified period. Higher ratios are considered favourable, and this ratio offers much more information when compared with the results of a similar corporation. General Motors has encountered a 2-3% rise in Net profit margin from 2020 to 2021. Whereas, Tesla has shown an 8% rise in net profits (Tesla annual report, 2021). It can be claimed that in terms of net profit in relation to sales, Tesla has performed better in comparison to General Motors. It is making better profits after making payments for rent, advertising, administrative and general expenses.

Debt to equity ratio – This ratio measures the debt liability of the corporation in comparison to the shareholders’ equity. It is substantial for the investors as debt commitments often have priority in case the organization goes bankrupt (Nuryani & Sunarsi, 2020). This ratio is chosen as it will help in knowing how much debt the company has. This solvency ratio provides insights into the ability of the corporation to clear its long-term liabilities. It assesses the dependence of the company on debt for its regular business processes and the possibility to repay the commitments. Both Tesla and General Motors have reduced the proportion of debt in their capital structure and raised the proportion of equity. However, Tesla has reduced more as it is now having a debt-to-equity ratio of 0.17 while General Motors have 1.75. The higher debt-to-equity ratio at General Motors signifies that the corporation is borrowing a higher amount of capital to fund its business operations (Nugraha et al., 2020). The lower debt-to-equity ratio of Tesla signifies that the corporation is using its assets and borrowing fewer funds from the market. Through this, the company is constantly reducing the interest expenses and thereby has an optimistic influence on the profitability of the company.

Asset turnover ratio – Corporations make use of assets to produce sales. It depicts how much net sales are produced from assets. The reason behind choosing this ratio is that it will aid in measuring the efficiency of the company with regard to using the assets to produce a higher level of sales. This ratio has remained consistent at 0.52 for both years in the case of General Motors (General Motors annual report, 2021). On the other hand, this ratio has improved from 0.60 in 2020 to 0.87 in 2021 in the case of Tesla. The lower ratio at General Motors indicates that the corporation is not making effective and efficient use of assets whereas Tesla is comparatively making efficient use of assets.

P/E ratio – It is a major investor ratio that trials how valuable the corporation is related to the book worth EPS. This ratio is a market-based ratio which signifies how valuable the company is. This ratio is used by external shareholders like market analysts or investors but can also be used by used internal management staff to evaluate the value per share of the company (Bustani et al., 2021). This also acts as the valuation ratio that normally relies on the current share price of the corporation and reveals whether the stock is an attractive investment option at the time. This ratio has slightly decreased from 9.55 to 8.65 for General Motors whereas, in the case of Tesla, it has substantially reduced from 317.68 in 2021 to 62.90 in 2020 (Tesla annual report, 2021). Normally, the greater the P/E ratio, the finest the stock and vice versa. The higher P/E ratio does not essentially mean that the stock is costly and must be sold. It merely means that the stockholders are ready to pay the premium to grasp the stock of the company. General Motors with the lower P/E ratio are often regarded as the value stock. It signifies that the stock of General Motors is undervalued as its stock price trade lower in relation to its fundamentals. Tesla with a higher P/E ratio is often considered a progress stock. This indicates an optimistic future performance and investors intend to have greater expectations for future income growth and are ready to pay higher amounts for them (Gagliolo & Cardullo, 2020).

Recommendation

After stronger financial figures in 2021, Tesla is in a much healthier financial position than it was a few years back. In the year 2021, Tesla was money-making, beat the EPS marks every quarter and has a much-improved debt-to-equity ratio. The financial health of Tesla has significantly enhanced over the years. In 2021, the corporation was profitable and though it has seen a decline in the cash stability, it received over $2.6 billion of operational profit in quarter 4 of 2021 alone. Also, Tesla has used various unconventional strategies to improve its liquidity position. By undertaking the payments from consumers who placed orders for model 3s, the company was capable to monetize the goodwill and patience of its consumers (Benmelech, 2023). Such deposits, which amounted to over $925 million by 2021, assist as interest-free advances, allowing Tesla to kill 2 birds with a single stone: improving its liquidity while assisting to support the obligations of loyal fans of Tesla. The investment of Tesla in automation and research activities was initially a liability, however, now they have become an asset because of their long-term sustainable competitive edge in terms of the quality of the product. Its differentiation in products arrives in the form of regular software updates, customizable cars, solar panels, self-driving structures and amplifying compatibility (McCoy et al., 2019).

On the other hand, General Motors delineated its track to twofold annual incomes from 5 -a year average of over $140 billion by the end of the period, with software and new firms mounting at over 50% CAGR through 2023 and the stronger central auto corporate driving the progress of the company. It strongly believes that its transformation can deliver margins of over 12-14% by end of the decade with the expansion of margins of the central auto corporate as EVs scale, charges of battery decline and the corporation inclines up greater margin software and new business stages. GM estimates EV proceeds to grow from over $10 billion in 2023 to around $90 million on annual basis by 2030 as the corporation unveils various convincing EVs in greater volume segments (General Motors, 2023). GM envisages a track where linked devices and other new firms drive over $80 billion in new, incremental revenue with most of the development pacing via the back half of the decade as they gauge. With a cruise, GM has the market-leading situation in independent services with the latent to make delivery of over $50 billion as annual proceeds by the end of the period. Yearly General Motors capital outlay, including the reserves in the Ultium joint undertakings, are assumed to be in the $9 billion to $10 billion range from the medium term as the corporation transitions to the major proportion of the EV product portfolio (Formica, 2023). Because of the strong incomes and the growing margins, the corporation assumed to completely fund such reserves via internally produced funds.

Both companies are facing rising rivalry in the EV space, which will probably corrode their margins and the risk of downturn is impending over all the automakers. However, Tesla is in an effective fiscal position, with its past of financial discernment and confirmed record. The stronger liquidity position of Tesla and comparatively lower debt earned the corporation the credit score elevation to BBB by S&P, and its rating will go even higher. General Motors ensures vehicle safety. Safety engineered via the human lens means growing the initiatives to support safer driving and technologies that may aid in mitigating crashes (General Motors, 2023).

From the ratio analysis performed for Tesla and General Motors, it is highly recommended to the CEO, to make an investment of 70% of total funds (£1000000) in Tesla stock and the remaining 30% of £1000000 in the stock of General Motors. It is because both companies are performing well in the automobile industry and their financial performance is also improving as can be seen from the increase in net profit margin. The higher net profit margin indicates that the companies are capable of efficiently controlling the costs and providing goods or services at the price substantially greater than their costs. However, Tesla has performed relatively better than General Motors, which is why a higher amount of investment must be made in that company only. Also, investing in two securities would be better for the investing company as if one company's performance declines in the near future, then there are chances that other companies may outperform the market. Diversification is regarded as the practice of spreading the investments around so that the investing company’s exposure to any one form of stock is limited (James et al., 2022). This practice will help the company in reducing the volatility of the portfolio over time. It will be an effective technique for the company as it will reduce the risk by allocating the total investment amount across different companies. It aims at minimizing the losses by investing in distinct areas that would each react distinctively to similar events.

The liquidity position of both companies has improved and has been computed as greater than 1 which signifies that they have enough amount of current assets to pay off the short-term debt obligations. Both firms have higher growth prospects that they aim to accomplish in the upcoming years. The company's stronger balance sheet will permit them to continue capitalizing in its growth urgencies while upholding the investment score rating that is significant for longer-term growth.

Conclusion

It can be concluded that both companies are efficient for investment purposes. They are producing higher margins of profit and have higher growth prospects to be fulfilled in future. The management of Tesla is efficient and effective in making optimum use of assets to derive higher revenue and profitability. The stronger liquidity position depicts that they would not face any problems in meeting their short-term financial obligations. Tesla has initiated that its mission is to pace the world towards maintainable energy. The corporation introduced its innovation in the automobile sector as the niche differentiator, providing market-disrupting items in the form of indulgent electric vehicles. On the other hand, General Motors is focused towards delivering a world-class consumer experience while developing loyalty, brands and software-enabled amenities. Its objective is to have a worldwide vehicle group with progressive stages and leading-edge technology including autonomous and electric vehicles. It has been recommended that the CEO of the investing company must invest in shares of both the companies in 7:3 Tesla and General Motors respectively as both the companies have strong financial performance and positions in the automobile industry.

References

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