General Motors’s 23.8% return over the past six months has outpaced the S&P 500 by 13.4%, and its stock price has climbed to $58.68 per share. This performance may have investors wondering how to approach the situation.

Is now the time to buy General Motors, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Is General Motors Not Exciting?

Despite the momentum, we're sitting this one out for now. Here are three reasons why GM doesn't excite us and a stock we'd rather own.

1. Weak Sales Volumes Indicate Waning Demand

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Automobile Manufacturing company because there’s a ceiling to what customers will pay.

General Motors’s units sold came in at 974,000 in the latest quarter, and over the last two years, averaged 2.5% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, General Motors’s margin dropped by 7.9 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity. General Motors’s free cash flow margin for the trailing 12 months was 7.7%.

3. High Debt Levels Increase Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

General Motors’s $135.7 billion of debt exceeds the $29.34 billion of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $20.34 billion over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. General Motors could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope General Motors can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

General Motors isn’t a terrible business, but it isn’t one of our picks. With its shares topping the market in recent months, the stock trades at 6.4× forward P/E (or $58.68 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.

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