Importance of margins
Previously, we discussed how General Motors (GM) has taken some steps that have negatively affected its global market share. However, these steps have been taken to expand its margins. In this article, we’ll take a closer look at GM’s margins.
In general, margins are one of the most important parameters used to analyze an automotive company (XLY). Significant and sustainable expansion in an automaker’s profit margins indicates sound growth in terms of its profitability.
Therefore, investors must pay attention to the margins of various auto companies to better understand the profitability of their businesses.
General Motors’ margins and the competition
This higher margin is likely the result of consistent efforts made by General Motors’ management to protect its margins, even at the cost of losing market share. As we noted in our previous article, these efforts have included cutting fleet sales in the United States and withdrawing the Chevrolet brand from Europe.
Japanese automaker Toyota Motor (TM) has an industry-leading margin of 19%, much higher than GM’s. This is primarily due to a difference in product mix. Toyota has a strong presence in the premium vehicle segment, which yields higher margins than mass-marketed vehicles.
In 2015, General Motors’ EBITDA (earnings before interest, tax, depreciation, and amortization) margin stood at 8.5%. This was higher than Ford’s 7.5%. In contrast, Toyota and Volkswagen (VLKAY) had higher EBITDA margins of 15.3% and 14.6%, respectively, during the same period.
Note that in the last couple of years, Toyota and Volkswagen both benefited from weakening local currencies, that is, the Japanese yen and the euro, respectively. We’ll talk about the factors that affect General Motors’ margins in the next article.