At current trading prices, GM sports a price/trailing earnings ratio of 13.4 times and a price/book ratio of 175%. These levels are well below metrics for comparable manufacturers of durable goods based inside and outside of America. Therefore, at surface level, GM common shares appear inexpensive, even after soaring during the past 12 months.
Is this the correct way to think about the investment merits of holding GM common shares in your portfolio? Or, should we re-evaluate GM financial reports and also think more broadly about the wider macro-economic and geo-political context?
A Case for Caution Concerning GM Common Shares
When financial analysis matters most, investors care deeply about the realistic growth trends in revenue, profit and "free cash flow."
During nine months ended Sept. 30, 2013, total revenue for GM grew a skimpy 1.8% compared to 2012. It would seem that reported revenue growth struggled to keep pace with inflation.
Alarm bells start to ring louder looking more closely at GM's gross and net cash flow margins.
In 2013, GM pulled in $9.6 billion in cash flow on $114.9 billion in revenue, or 8.33 cents for each sales dollar. The prior year, GM earned $9.8 billion in cash flow on $112.9 billion in revenue or 8.70 cents for each sales dollar.
Subtracting capital expenditures, GM earned $3.8 billion in net cash flow or 3.30 cents per sales dollar in 2013 compared to 3.36 cents per sales dollar in 2012.