How Well Are US Carmakers Prepared For The Upcoming Recession?

The coronavirus has hit the U.S. economy very sharply. Last week was the worst week for the stock market since 2008, despite the fact that the Federal Reserve has taken some very serious actions.

It is quite clear that bad times are ahead for everyone, especially for the sensitive and already troubled automotive industry. Morgan Stanley analysts expect that auto sales numbers will drop very sharply in the U.S., by as much as 90% in the next three months. Based on China's experience, where auto sales numbers fell by 80%, this forecast sounds quite realistic. The question is how well are automakers prepared for such a negative scenario?

Balance Sheets Can Provide The Answer

At this point, we can expect serious revenue shortfalls for all U.S. auto manufacturers. How big will those losses be is hard to predict because no one knows for sure how long will this crisis last. 

In times of such an unprecedented crisis, liquidity is of crucial importance. What financial managers want in times of crisis is for companies to have a mountain of cash and for their total current assets to be much greater than current liabilities. With big cash balances and very positive net current assets, the company has a much better chance to survive both in the short and mid-term, even with serious losses. All those numbers can be found in the company's balance sheet.

What Do U.S. Carmakers' Balance Sheets Say?

Well, the numbers are mixed, but generally positive. As of the end of 2019, the combined net working capital of Detroit's big three carmakers was approximately -$500 million. Ford Motor Company's F net current assets were positive (approximately $16 billion), while General Motors GM and Fiat Chrysler F showed negative results, negative $7 and $9 billion, respectively. 

During recessions, banks can be hesitant to provide further financing to companies. Thus, the figure behind net current assets is usually the only source of cash and the only source of debt repayment. If the net current assets figure is negative, then companies have very little space to maintain liquidity if the crisis prolongs. Creditors will ask questions to find out how those companies will meet their current liabilities. If no answer is provided, they will try to reduce their exposure faster, only adding more financial pressure.

Luckily, Detroit's big three have the answer. It is a mountain of cash and cash equivalents. As of the end of the year, General Motors , Ford and Fiat Chrysler had combined approximately $75 billion of cash reserves. The amount is big enough to cover approximately one third of total current liabilities. It will help CFOs to meet a lot of current liabilities and refinance them with long-term debt. It will also help them to survive despite negative net current assets.

This article is not a press release and is contributed by Ivana Popovic who is a verified independent journalist for IAMNewswire. It should not be construed as investment advice at any time please read the full disclosure . Ivana Popovic does not hold any position in the mentioned companies. Press Releases – If you are looking for full Press release distribution contact: press@iamnewswire.com Contributors – IAM Newswire accepts pitches. If you're interested in becoming an IAM journalist contact: contributors@iamnewswire.com Questions about this release can be send to ivana@iamnewswire.com

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