Ford v. GM - Why The Latter Is Screwed and The Former Isn't - Some Numbers

[Median Democrat]

The first tool you use is called the current ratio. A measure of just how much liquidity a company has, this number is simply the current assets divided by the current liabilities. As a general rule, a current ratio of 1.5 or greater can meet near-term operating needs sufficiently. A higher current ratio can suggest that a company is hoarding assets instead of using them to grow the business -- not the worst thing in the world, but it's something that could affect long-term returns.

Ford: 1.3
GM: 0.6

Second, Quick ratio = (current assets - inventories) / current liabilities. Most people look for a quick ratio greater than 1.0 to be sure there is enough cash on hand to pay bills and keep going. Like the current ratio, the quick ratio can also vary by industry. It always pays to compare this ratio to that of peers in the same industry to understand what it means in context.

Ford: 1.3
GM: 0.3

This is why it is a misnomer to treat the entire auto industry as a singular entity, as the press and politicians often do. Ford may not be setting any profit records any time soon, but it is not going out of business immediately but for government assistance. However, GM is really a dead corporation several times over, and it needs to either cut (1) its debt obligations or (2) it expenses to get those ratios so that they approach normalcy. This may explain why bankruptcy and a reorganization may be necessary. Bond holders needs to take a larger haircut than they have been willing to offer, and any government bailout without such concessions is essentially a transfer of money from the government to the financial industry all over again.


In short, Ford and GM are entirely different places right now, which is why Ford does not need a bailout, but GM has been receiving bailouts since 2008. I think Obama is doing the right thing in insisting on a real plan or path to solvency, because the best long term solution may be to use BK to force a cram down of debt for the bondholders, to get the ratios into reasonable territory, then offer bailout money that does not automatically go to GM's creditors, which can be used to restructure the company.

I support Obama's plan.

[Trajan]

1. We needed two separate threads for this ?

[geek tragedy]

2. Do you have sources for those numbers?

Not doubting, but rather would be interested in further research of my own.

[Median Democrat]

3. Certainly. Here you go - Choose "Ratios and Returns"

Here is the link:

http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=GM

Just put "F" the Ford symbol after you are done looking at GM. Also, the definition of current ratio and quick ratio are found on Motley Fool, though you can pretty much google them, and get the same definition.