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A financial health analysis of the General Electric Company (GE) is presented. The three major sections of the analysis are (1) economic climate, (2) industry analysis, and (3) firm analysis.
Economic climate is reviewed in relation to past, present, and probable future conditions. GE is the world's largest diversified company and operates globally. Thus, economic climate must be considered in both global and domestic contexts.
Global Economic Climate
The global economy has experienced severe turbulence over the past five years. The aftereffects of the Asian economic meltdown, which included the plunging into recession of the world's second largest single economy Japan, continued to be felt near the end of the first calendar quarter of 2000 (Roach, 2000). The economic problems that confronted Southeast Asian economies beginning in the summer of 1997 were especially serious (Son, 1999). From the early 1970s until the beginning of the economic crisis in Southeast Asia, however, the economies of that region were envied for their spectacular records of economic growth (International Monetary Fund, 1998). While the economic management and focus in each of the economies of Southeast Asia varied, one point of uniformity was an emphasis on stability-oriented macroeconomic policies. These policies sought to achieve low rates of price inflation, an avoidance of overvalued currencies, high rates of physical and human capital accumulations, high rates of personal savings, and export-oriented production. These policies brought substantial economic success to the Southeast Asian economies generally (International Monetary Fund, 1998).
The short answer to the causes of the economic and financial collapse in Southeast Asia is that it was a chain reaction involving the region's banks and commercial firms: Regional banks borrowed heavily from foreign sources at high rates of interest, and then loaned this costly capital to regional companies, which then built up huge levels of costly debt. To service this costly debt, Southeast Asian companies needed to maintain high levels of demand for their products. When demand faltered in mid-1997, the entire system collapsed upon itself. As a consequence, the entire region experienced a severe loss of liquidity (Marshall, 1998).
Southeast Asia began to renew its economic growth in early 1999, and slow growth continues in the region, with the exception of Japan, the most important economy in the region. Japan officially slipped back into recession with two consecutive quarters of negative economic performance in late 1999. Japan did experience growth in late 1998 and early 1999, before slipping once again into economic recession. The outlook did not improve substantially for Japan until 2001 (Feldman, 2000).
Economic performance in the European Community has been generally positive for the past three years, although the birth pangs of the euro have caused some concerns. For the most part, however, the European Community appears set to record strong growth in both 2000 and 2001 (Fels, 2000).
Global economic growth is projected to exceed four percent in both 2000 and 2001. Most regions other than Japan, Africa, and many of the former socialist economies in Eastern Europe are expected to record growth during this period (Roach, 2000). Projected economic growth for the world and the most important economic regions are illustrated in Exhibit 1, which may be found in the Appendix.
The Organization for Economic Cooperation and Development (OECD) predicted global growth at somewhat lower levels than those presented in Exhibit 1. The OECD projected global growth at 3.5 percent in the 2000-2001 periods, with higher growth levels outside the OECD area compared to within the OECD countries. The OECD projections identified Russia and Latin America as special problem areas, and expressed concern for fiscal problems in Japan (OECD, 2000).
United States Economic Climate
The United States economy has experienced an unprecedented record of sustained economic growth. Real gross domestic product (GDP) increased each quarter beginning with the second calendar quarter of 1993 and continuing through the fourth calendar quarter of 1999. Current indications are that growth will be recorded in the first calendar quarter of 2000. A record of real GDP performance in the United States economy for the period 1987 (first calendar quarter) through 1999 (third calendar quarter) is presented in Exhibit 2, which may be found in the Appendix. Housing starts have been strong since 1994 and are projected to remain strong in 2000 (USDC, 2000).Industrial production, however, has been slowing but is projected to stabilize in 2000. Inflation has remained near or under the three percent rate since 1992. The Consumer Price Index (CPI) for January and February recorded an annualized rate of 1.5 percent (USDC, 2000).
The OECD projects slowing growth in the United States in both 2000 and 2001, with a 3 percent rate of growth in 2000 and a 2.6 percent rate of growth in 2001 (OECD, 2000). Morgan Stanley Dean Witter projects a growth rate of 4.5 percent for the United States in 2000, slowing to 3.5 percent in 2001 (Roach, 2000).
The United States economy continues to be highly diversified. Oligopoly, however, characterizes the major manufacturing industries in the United States. Electronic commerce as yet remains less concentrated than do the more traditional industries in the United States. Even in the area of electronic commerce, however, merger activity is increasing.
Considering the entire economy, however, seven-eighths of all firms employ fewer than 20 persons. Only one-tenth of one percent of firms in the United States employ 1,000 or more employees (Hyde, 2000).
GE participates in several industries; therefore, each of the industries in which the company participates""wherein the activity of the company in that industry represents a substantial proportion of total company output""must be considered.
GE is best known to most consumers for the company's line of household appliances. Among industrial concerns, GE is best known for its aircraft engines and its industrial systems. In actual fact, however, the strongest contribution to the company's revenues and profits are those of the General Electric Capital Corporation, which contributes 41.5 percent of total corporate revenues (GEC, 2000). GE's subsidiaries, their contributions to corporate revenues, and the primary industries in which they compete are presented in Exhibit 3, which may be found in the Appendix.
GE is the largest and most profitable of the conglomerate companies operating in the global economy. The firm ranks fifth in the Fortune 500. With respect to revenues, the company generates 68 percent from the United States, 20 percent from Europe, and 12 percent from the rest of the world. With respect to earnings, 76 percent is generated from operations in the United States, 16 percent from European operations, and 8 percent from the rest of the world (Hoover's Inc., 2000).
The investment industry within which GE Capital operates is projected for continued growth, as is the miscellaneous electrical products industry, within which GE Industrial Products & Systems competes. Growth in the commercial aircraft production industry, upon which the aerospace (major diversified) industry depends, is projected through 2010. GE Aircraft Engines is a major competitor in the aerospace (major diversified) industry. Growth is projected in each of the industries in which the remaining GE subsidiaries compete. Further, the GE subsidiaries are either market leaders or major competitors in each of these industries (Hoover's Inc., 2000; GEC, 2000).
The General Electric Company was established in 1892 as the outcome of a merger between the Thomas-Houston Company and Edison General Electric Company. Thomas Edison was a member of the company's first board of directors. General Electric has always been successful and has continually looked for diversification opportunities. GE was one of the original partners in the Radio Corporation of America (RCA), the developer of the National Broadcasting Company. GE divested its RCA equity in 1930 as a part of an antitrust settlement. GE reacquired NBC lock, stock, and barrel in the mid-1980s through its merger (acquisition) of RCA. Throughout the 1990s, GE conducted an active acquisition and diversification strategy (GEC, 2000). In the early days of the twenty-first century, GE actively pursued the transformation of its consumer-oriented businesses toward an e-commerce orientation. The company also is seeking to expand further outside of North America (GEC, 2000).
Common-size analyses of the company's income statements and balance sheets are presented in Exhibits 4 (income statements) and 5 (balance sheets). These exhibits, which may be found in the Appendix, cover the period 1997-1999.
As the data presented in Exhibit 4 indicate, revenues from services (including General Electric Capital Services [GECS]) revenues continue to grow at the expense of revenues from the sales of goods. Services now account for 56.5 percent of GE"tms total revenues. Operating profit on the sale of goods in 1999 was 25.6 percent, whereas operating profit in the sale of services in that same year was 65.5 percent. Revenue growth at GE appears to be following the most profitable areas of business.
Net earnings at GE grew substantially from 1997 to 1999. Further, net earnings are quite high for a firm the size of GE.
As the data presented in Exhibit 5 indicate, proportional asset composition did not vary to any appreciable extent during the 1997-1999 period. Similarly, the proportional composition of the company's liabilities and equity structure was quite stable during the period.
Financial ratio analyses were also performed on the company for 1999. The results of these ratio analyses were as follow:
1. Liquidity Ratios
a. Current Ratio: 1.69:1. The company's current position was strong in 1999.
b. Acid Test: 1.65. GE carries very little inventory in relation to the total financial scope of the company's operations. The acid test ration was quite strong in
c. Interest Coverage: 1.0. Interest was higher than desirable in 1999 at GE.
2. Activity Ratios
a. Inventory Turn: 15.9 times. The relatively low inventory level at the company makes this measure less useful than in the case of a more typical company. In great part, this ratio reflects the company's shift to service businesses.
b. Fixed-Assets Turn: 2.7 times. The fixed asset turn was strong in 1999.
c. Total Assets Turn: .28. Total asset turn was quite low in 1999.
d. Mean Collection Period: 28.3 days. The company's receivables position in 1999 was strong.
3. Leverage Ratios
a. Total Debt/Equity: 8.4. The total debt-to-equity ratio at GE in 1999 was too high for good financial health.
b. Long-Term Debt/Equity: 4.6. The long-term debt-to-equity ratio at GE in 1999 was too high for good financial health.
4. Profitability Ratios
a. Net Profit/Net Sales: 9.6 percent. Net profit on sales was strong in 1999.
b. Operating Margin: 25.6 percent on sales of goods and 65.5 percent on sales of services. The operating margin on goods was unsatisfactorily low, while the operating margin on sales of services was strong.
- Return on Assets (ROA): 2.6 percent. ROA was far too low. This ratio reflects the low turn of the company's total asset base.
d. Return on Equity (ROE): 25.1 percent. The company's ROE was very strong.
5. Market performance
a. Earnings-per-Share (EPS): EPS in 1999 was $3.22, which represented no change from 1998.
b. Price/Earnings (P/E): The 1999 P/E ratio was 48.1, which was up from 36.4 in 1998. As of mid-March 2000, however, the company's P/E ratio was down to 40.9.
GE gross profit margin is much higher than that for the industry, as is the company's net profit margin. ROA at the company, however, is substantially lower than that for the industry, although ROE at the company is superior to that for the industry. Asset turnover is much lower for GE than for the industry (Hoover Inc., 2000).
A major strength of the company is its diversity of business interests. A major weakness of the company is a very large asset base that is characterized by unacceptably low activity levels. The major opportunity open to the company is in the extension of its financial services to global areas outside of North America and Western Europe. The major threat to the company is the relative weakness of its goods-producing businesses. These businesses are currently a drag on the company, and increasing globalization threatens to make matters worse.
Overall Summary of the Company's Financial Condition
GE is a financially strong company. The weakness in activity involving asset turn, however, is a threat to the continued financial strength of the company. Further, the company's debt ratios are likely too high to sustain over the long-term and represent a threat to future liquidity. Assessment of the Market Price of the Company's Common Stock General Electric common stock closed Friday, 17 March 2000 at $139.875. That price was up from $131.69 a week earlier, but remained well below the October-December 1999 average market price of $159.50. The company"tms P/E ratio is superior to that for the conglomerates industry. The company"tms common stock appears to be at approximately the correct market price level in March 2000.
Global Economic Growth: Actual and Projected
Source: Roach, 2000.
GE & Subsidiaries: Revenue Contributions & Industries
ENTITY REVENUE CONTRIBUTION PRIMARY INDUSTRY
GE 100.0% Conglomerates
GE Capital 41.5% Investment Firms
GE Industrial Products & Systems 11.2% Miscellaneous Electrical Products
GE Aircraft Engines 10.3% Aerospace""Major Diversified
GE Power Systems 8.5% Turbines, Transformers & Other Electrical generation Equipment
GE Plastics 6.6% Plastics & Fibers
GE Appliances 5.6% Appliances
GE Technical Products & Services 5.3% Medical Appliances & Equipment
National Broadcasting Company 5.2% TV Broadcasting
Montgomery Ward Holding Co. 3.6% Department Stores
All Other (Total of 19) 2.2% [Several: Diversified]
Source: Hoover"tms Inc., 2000.
Common-Size Income Statement Analysis: GE 1997-1999
ITEM 1997 [%] 1998 [%] 1999 [%]
Sales of Goods 44.8 43.5 42.8
Sales of Services 14.0 14.8 14.6
Other Income 2.5 .6 .7
GECS Services Revenues 38.7 41.1 41.9
Total Revenues 100.0 100.0 100.0
Costs & Expenses
Cost of Goods Sold 34.0 31.6 31.0
Cost of Services Sold 10.1 10.4 10.2
Interest & Charges 9.3 9.7 8.9
Insurance Losses 9.1 9.6 8.9
Provision for Losses 1.5 1.6 1.5
Other Costs & Expenses 23.5 23.4 24.2
Minority Interest .2 .3 .3
Total Costs/Expenses (87.7) (86.6) (86.0)
Earnings Before Taxes 12.3 13.4 14.0
Provision for Taxes (3.3) (4.2) (4.4)
Net Earnings 9.0 9.2 9.6
Common-Size Balance Sheet Analysis: GE 1997-1999
ITEM 1997 [%] 1998 [%] 1999 [%]
Cash & Equivalents 1.1 1.2 2.1
Investment Securities 22.1 22.1 20.2
Current Receivables 2.5 2.3 2.1
Inventories 1.7 1.7 1.7
GECS Receivables 41.2 41.2 41.3
Fixed Assets 9.9 10.0 10.1
Other 21.5 21.5 22.5
Total Assets 100.0 100.0 100.0
Liabilities & Equity
Short-Term Liabilities 39.8 39.8 39.8
Long-Term Liabilities 47.8 48.1 48.4
Total Liabilities 87.6 87.9 88.2
Common Stock .2 .2 .1
Other Capital 3.4 3.6 3.8
Retained Earnings 13.8 13.7 13.6
Treasury Stock (5.0) (5.3) (5.6)
Total Liability & Equity 100.0 100.0 100.0