Financial Analysis for GE
Principles of Accounting I
Financial Analysis for GE
I have choose to use General Electric for this assignment because me grandmother worked for this company for over forty years and she at age ninety still has found memories’ of her time there. And still takes great pride in its current and past success. The financial analysis gives the bright outlook of the performance parameters of an organization. It helps in evaluating and comparing the present as well past performance. This analysis is an essential tool for the management, investors as well as the outsiders who deal with the organization. This analysis presents the function and the direction in which an organization is moving. The analysis is done with the help of common size analysis, comparative analysis and Ratio Analysis. The analysis is done with the help of typical size analysis, comparative analysis, and Ratio Analysis. This study is done with the help of respective annual reports of the companies.
About the company
General Electric Company is incorporated in Schenectady, New York, and the headquarters are situated in Fairfield, United States, And it is an American multinational company. There are four segments of the company, Energy, Technology Infrastructure, Capital Finance and Consumer & Industrial. GE is operating in Diversified Machinery Industry. The company faces fierce competition from Citigroup Inc., Philips, and Siemens. GE offers a wide range of products from air-cooled heat exchangers to wind turbines. The innovative energy technology of General Electric provides real-world solutions to their customer’s toughest challenges. The technologically advanced product and services of General Electric from oil, gas, power, water, and energy management business assist customers in producing energy efficiently, reliably, cost-effectively with increased awareness about environmental responsibility.
Ratio Analysis is regarded as the essential instrument of financial analysis. It is a step for developing the meaningful connection between a specific item or group of items in the balance sheet or income statement. Ratio Analysis is useful in the analysis of company’s performance by internal as well as external users. The users consist of managers, investors, long-term creditors and short-term creditors. The managers are keen on knowing the profitability and asset utilization of the company as their bonus and promotions are dependent on it. The greater the profitability the larger the chances of appraisal. Thus, managers are always interested in evaluating the various financial ratios of the company.
The equity investors are interested in knowing about the profitability, solvency and market ratios of the company. Because a higher profitability ratio will increase the market value of the company. The market ratios like price earnings ratio, earnings per share, dividend yield, etc. tell the exact position of the company’s share in the market. A favorable market ratio indicates the increase in market capitalization for investors. The equity investors are also interested in knowing the solvency ratio as high debt will pose a danger to their ownership of the company. Higher debt is harmful to the liquidity position of the company and in the worst cases; the company even faces the risk of liquidation.
The long-term and short-term creditors are mainly concerned about the liquidity and solvency position of the company. An increase in the debt increases the debt-equity ratio of the company. Generally, the investor is interested in the company with high debt. If the liquidity position of the company is not proper, then the creditors face the risk of their dues were not paid. Therefore, ratio analysis plays an important role in the performance evaluation of a company.
The horizontal analysis is also known as comparative analysis; these types of financial statements are formulated to give time perspective to the different elements of the financial position mentioned therein. It can be prepared for both balance sheet and the income statement.
Balance Sheet: A comparative balance sheet represents the effect of operations on the assets and liabilities, i.e., change in the financial position during the period under consideration. The comparative balance sheet shows the balance of assets and liabilities on different dates and also the extent of their increase or decrease between these dates. This helps assists in predicting the future position of the business. The proportion of total assets decreased marginally during the three years being reviewed. In 2011-12, there is a decline of 7.20% in the total liabilities, and for the remaining years, the decline was marginal. The total equity increased significantly by 8.75% during the year 2011-12.
Income Statement: A Comparative Income Statement shows an overview of the operating activities of the business. It represents the balance of net revenue, expenses, and net income on various dates. It also shows the extent of their increase or decrease between these dates. This information assists in predicting the future position of the business. Total revenues were experiencing a continuous decline, but during 2011-12 it increased marginally by 0.05%. The total costs and expenses were also declining in the past three years, but during 2011-12 they showed an upward movement of 2.30%. After experiencing two continuous upward movements of 41.94% and 42.79% during the year 2009-10 and 2010-11 respectively, the operating income decreased by 14.07% during the year 2011-12. The increase in the net income was 3.97%, 15.66% and 5.77% during the year 2012-11, 2011-10 and 2010-09 respectively.
Liquidity ratios can be used to evaluate the cash or current asset availability of the company. It assists in comparison of short-term liabilities with short-term assets. Liquidity ratios depict the connection between a firm’s capital and other current assets to its current liabilities. The current ratio of the company is entirely satisfactory as it is above the standard norm of 2:1. This implies that company has sufficient current assets to pay off its short-term obligations. The quick ratio of the company is outstanding as it is more than double of the standard norm of 1:1. This implies that the company is not maintaining the high balance of inventory in its current assets. The cash ratio of the company has shown significant improvement as well.
Industry / Competitor Analysis
General Electric is dealing in sector of industrial goods and belongs to the diversified machinery industry. The close competitors of the company include Citigroup Inc. listed under the ticker symbol C, Philips Electronics NV (PHG), Siemens (SI).
|Qtrly Revenue Growth||0.13||0.05||0.07||0.02||0.02||77/414|
|Earnings per share||1.29||2.44||0.32||6.33||0.77||108/414|
|Price Earnings Ratio||17.89||17.85||92.37||16.78||35.09||106/414|
|PEG (5 year expected)||1.24||0.77||15.71||0.23||0.96||34/414|
The company seems to be far ahead of its competitors regarding market capitalization, quarterly revenue growth rate, revenue generated, earnings before interest, tax, depreciation the number of employees working in the company, amortization and net income generated. The other statistics like gross margin, operating margin, earnings per share, price earnings ratio, price earnings growth ratio and price to sales ratio indicates that the company is not a market leader, but is performing reasonably well. Therefore, in diversified machinery industry, the company can be considered as one of the most favored investment opportunity. GE potentially has competitive advantage. This could be because of strong branding, ability to keep costs low, and some other features that are hard to replicate.
Financial Strength & Weakness of GE
Financial Weakness: Financial Position of GE is not ideal because the company is using debt for growth purposes. Highly capital-intensive business follows such route and this can deeply affect the future prospects of the company. The company has not been successful in generating sufficient return from its investment in buildings, projects and equipment. The main reason behind this was lack of management or capital-intensive nature of the business. GE has only created $5.33 of cash for every $100 invested. The return on equity of the company has been shrinking for the past five years. This is a negative signal and indicates that the performance of the management is weakening over a period of time. GE is able to generate $13.62 of earnings for every $100 of shareholders’ equity.
GE has continuously distributed the dividend for past ten years, and this long dividend history means that the company is quite established in the market and is likely to spread the profit for a longer period. A company is spending the considerable amount of money on buying new equipment or new facilities to stay in the competition. Over the long term, the cost of these facilities has to be met from debt. This strategy is having a negative impact on the company as the return on shareholders’ equity is decreasing continuously. The company is spending approximately 81.55% of profits on capital expenditure like property, plant, and equipment needed to run the business.
Financial Strength: The Company has consistently retained its profits. This may help GE in gaining a strong position to invest for future by purchasing new machinery, investing in research and development or the variety of other options. By effective use of earnings, GE can strongly improve their long-term economic picture. The company has been able to maintain profitability in good as well as bad times. This implies that GE has the extremely strong business and can reduce its costs when required. The company can generate positive cash flows for past ten years. The company can generate $10.51 profits on every $100 of revenue on an average over past ten years.
The company is growing quickly and improvement is expected in its future earnings and growth. The long-term prospects of the company are favorable and it can be viewed as attractive investment opportunity by the investors. For creditors, it is not a very positive investment opportunity because of the high debt burden. The credit analysis of the company shall be carried out carefully before granting credit to the company.
Annual Report of GE for the year 2012
Annual Report of GE for the year 2011
Annual Report of GE for the year 2010
Richard A. Brealey, Stewart C. Myers, Alan J. Marcus, (2003), Fundamentals of Corporate Finance, 4e
Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan, (2008), Fundamentals of Corporate Finance: Standard Edition, Eighth Edition
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