IT IS fashionable to say that the city of Detroit is on the up after decades of decline. Amid the derelict buildings there are signs of revival; art shops and trendy food trucks abound. But for a truer augury of the city’s possible future, consider the rock-bottom stockmarket valuations of Ford and General Motors (GM), Motor City’s two big domestic car firms. (A third, Chrysler, is owned by Fiat Chrysler Automobiles, whose chairman is a director of The Economist’s parent company.) If you put the members of the S&P 500 index in order of their price-earnings ratios, Ford and GM are at the bottom, among the walking dead.
For their investors, creditors and 426,000 staff, about 18% of whom are in Detroit, it is a terrifying signal. A low price-earnings ratio is the stockmarket’s way of telling you that business as you know it is over. GM and Ford together made $18bn of underlying profit last year but have a market value of $98bn. That ratio implies that their…Continue reading