The market value of GM

Topics: Finance, Generally Accepted Accounting Principles, Economics Pages: 2 (304 words) Published: January 14, 2014
Possibly cash flows from operations is the best measure. This sometimes is said to avoid any distortions that arise from accounting rules and management manipulation. Does the market value GM based on its cash flow, rather than its earnings?

Usually, long term investors are looking more carefully on the company’s cash flows and the short time investors are interested more in the company’s earnings than the cash flows. Considering last 3 years of the GM operations we can see changes in earnings, cash flow from operations, dividends and how the market estimated the company.

2010
2011
2012
CFO
6,780
8,166
10,605
CFO per share
19.27
25.07
42.04
Net Income
6.172
9.190
6.188
Dividends
0
0
0
Share price
36.86
20.27
28.83
M/B ratio
2.07
1.11
1.59

Company’s CFO increased by 20% in Y2011 and continued to grow by 30% in Y2012, Net Income increased by 49% in Y2011 and declined by 33% in Y2012, and the share price decreased by 45% in Y2011 and increased by 42% in Y2012, so we can see that there is no correlation between CFO, NI and share price. It is possible in case when investors believe to analytical researches more than to data from the company’s financial report. The other possible reason of this investing behavior is the GM’s transition period from the company with the government shares to the company free from the government influence. In this transmission period the company is more interesting to the short term investors estimating the company based on its net income, than to the risk averse long run investors. So, GM market value based on its earnings rather than cash flow.

One source of volatility in earnings in recent years has been special items, or “onetime” charges. Does this make earnings a misleading measure of performance? Do investors make adjustments for special items? Both special items and onetime charges can be estimated as “occasional” and should be adjusted by investors considering the investment....
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