How can GM lose $38 billion and stay afloat?

John W. Schoen Senior producer • Profile • E-mail

Last week's news that General Motors lost more than $38 billion wasn't pretty.  And it has some readers scratching their heads and wondering: Just how much longer can this keep up before the company goes out of business?

How can GM post a loss of $38.6 billion when the company is only worth $19.2 billion?  News like this makes me think of Enron and all the creative accounting they did. Is GM trying similar tactics?
— A. J., Rochester, Minn.

Without an audit —which is only required once a year — you never really know what’s on a company’s books. But there is no reason to believe that General Motors is using anything other than standard accounting rules. And there’s certainly nothing to indicate that the company is trying to deceive investors with the kind of byzantine web of interlocking shell companies to hide losses that the folks at Enron turned into an art form.

In GM’s case, the company is “worth” quite a bit more than $19.2 billion; it looks like you’re referring to the “market capitalization.” That term is used to describe the total market value of all of GM’s common shares outstanding. (Since we got your mail, that market cap number had dropped to $18.7 billion at this writing.)

While common stockholders technically “own” a company, the total value of a company's shares is almost always less than full value of all of its assets if you were to sell off those assets tomorrow. (If not, the company is insolvent. Unfortunately, when that happens, shareholders usually get nothing, because bond holders get paid first.)

The list of assets on a company's books includes things like plants and equipment, parts in inventory, bills that haven’t been collected, and money stashed away for a rainy day in short-term investments. In GM’s case, that came to $149.5 billion as of Sept. 30, the most recent balance sheet available. The balance sheet is the basic financial statement used by every public company to account for its assets and liabilities; it’s called that because the two totals have to "balance" out.  

Though GM faces huge financial challenges, it’s also important to keep in mind that the $38.6 billion “loss” was from a one-time accounting charge — not from its operations. In this case, the charge represented a bundle of tax credits in the U.S., Canada and Germany that GM found it couldn’t use. For you and me, that’s like the difference between taking a cut in our salary and losing a big deduction on our tax return.

GM is still losing plenty of real dollars from operations: some $1.6 billion in the third quarter alone. But it is still taking in more than $40 billion in revenues each quarter and was sitting on $25 billion in cash as of Sept. 30 to help it ride out the storm. At that rate, GM could keep losing $1.6 billion every quarter for the next four years (not that anyone expects it to) before it had to sell other assets to stay afloat.

What happened to the reports on oil companies making record profits? They must be through the roof right now.
— Mary, Wisconsin

Actually, oil company profits these days are only through the stairway to the attic.

You don’t need to worry about oil companies posting losses like GM. Profits in the latest quarter were sizeable for both Chevron ($3.7 billion) and ExxonMobil ($9.4 billion). But those profits were down 30 percent from a year ago for Chevron and 10 percent for Exxon.

Wait minute: with oil prices zooming toward $100 a barrel, how can that be?

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