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?
The answer is that, in late summer and early fall, gasoline prices didn’t go up as fast as crude oil prices. So the oil industry’s refining operations weren’t able to pass along the higher cost of crude.
Though U.S. pump prices are headed higher again, the drop in gasoline demand that follows the end of the summer driving season left refiners and wholesales with plenty of inventory, as it usually does every year. With all that gas sloshing around the system, and gasoline retailers competing for business, pump prices were kept in check. But global demand for oil remained strong, and competition from oil buyers in other parts of the world drove prices higher.
The reason you haven’t heard much about this is that "Oil Industry Profit Margins Fall" just isn’t as interesting a story as "ExxonMobil Posts Record Profits." But it serves to illustrate a point that a lot of readers have trouble accepting — that oil companies don’t control the price of oil and they don’t set the retail price of gasoline. Those prices are determined by the markets, which ultimately consist of consumers of the product like you and me.
The best way to “rein in” gasoline prices is to figure out how to use less of it. Once we do that, the markets will take care of the rest. Until we do, there’s little point in blaming oil companies for producing a product we all want more of.
I have never understood what Dow points stand for. The Dow fell 350 points. What do the points represent? When the Dow first broke 10,000 it was a big, big deal. But 10,000 what? What does it represent in layman's terms? I hate to bore you with such a basic question, but I've searched for an answer online, and not had much luck.
— Matt,Seattle, Wash.
We like basic questions. And the fact that so many people find them “boring” helps keep us in business.
The Dow Jones Industrial index is a formula created by Dow Jones and Company, the publishers of The Wall Street Journal. It was created 101 years ago when you could pick 30 of the biggest stocks and use those to represent the ups and downs of the broader market. This was before computers did the calculating, so it also had the advantage of providing a quick check on “the stock market” by adding up the price of just 30 stocks and then dividing by 30.
Over time, most of the original stocks were replaced, and many of the remaining stocks “split” — which has the effect of cutting the share price. (A $100 stock split “two-for-one,” for example, creates two shares worth $50 each.)
Every time a Dow stock splits, you have to adjust the so-called “divisor” — the number that’s used to calculate the Dow Jones average. The current divisor is: 0.123017848, which means if you add up the 30 Dow stocks and divide by 0.123017848, you’ll get the Dow Jones Industrial average. (For extra credit, you can calculate the divisor on your own, using the formula on Dow Jones Web site.)
So each “point” on the Dow is just a notch on a scale that is still widely followed around the world — sort of like a "degree" on a thermometer.
Which raises another question: With computers now available to instantaneously track the thousands of companies that make up the U.S. stock market, or even broader indexes like the Standard and Poor’s 500, how come everyone still asks about an index that follows just 30 stocks?
The answer, we suspect, is that for all the talk about embracing the latest technology, the competition for the hottest new investment ideas and the desire to discover the Next Big Thing, the folks on Wall Street are still a pretty conservative bunch.
But that’s just a hunch.