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Financial Analysis of GE
The three major sections of the analysis are industry analysis, and firm analysis. From turbines and TVs, to aircraft leasing and power plants, General Electric is plugged in to businesses that shape the modern world. The company produces -- take a deep breath -- aircraft engines, locomotives and other transportation equipment, appliances, lighting, electric control equipment, generators and turbines, and medical imaging equipment. GE also owns mega-financial company GE Capital, which offers commercial finance, commercial aircraft leasing, real estate, and energy financial services. GE's other segments include Aviation, Home & Business Solutions, and Transportation. GE sold its appliances business to Electrolux in 2014.
Economic climate is reviewed in relation to past, present, and probable future conditions. GE is the world's largest diversified company and operates globally. Therefore, economic climate must be considered in both global and domestic contexts.
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., 2015).
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 2014. 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., 2015; 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 2012-2014.
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's total revenues. Operating profit on the sale of goods in 2012 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 2012 to 2014. 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 2012-2014 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 2012. 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 2012.
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 2012 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 2012.
c. Total Assets Turn: .28. Total asset turn was quite low in 2012.
d. Mean Collection Period: 28.3 days. The company's receivables position in 2012 was strong.
3. Leverage Ratios
a. Total Debt/Equity: 8.4. The total debt-to-equity ratio at GE in 2012 was too high for good financial health.
b. Long-Term Debt/Equity: 4.6. The long-term debt-to-equity ratio at GE in 2012 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 2012.
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 2012 was $3.22, which represented no change from 1998.
b. Price/Earnings (P/E): The 2012 P/E ratio was 48.1, which was up from 36.4 in 1998. As of mid-March 2014, 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 (Hoovers Inc., 2015).
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 2014 at $139.875. That price was up from $131.69 a week earlier, but remained well below the October-December 2012 average market price of $159.50. The company's P/E ratio is superior to that for the conglomerates industry. The company's common stock appears to be at approximately the correct market price level in March 2014.
Global Economic Growth: Actual and Projected
Source: Hoovers Inc, 2014.
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's Inc., 2015.
Common-Size Income Statement Analysis: GE 2012-2014
ITEM 2012 [%] 2013 [%] 2014 [%]
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 2012-2014
ITEM 2012 [%] 2013 [%] 2014 [%]
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
GENERAL ELECTRIC COMPANY Company Information. (n.d.). Retrieved March 28, 2015, from