- Introduction
This paper is a financial analysis of General Electric (GE) Company. GE is a multinational conglomerate company incorporated in the New York, United States. The four main segments of the company include; capital finance, technology, consumer & industrial, and energy. There are many products and services the company offers but within the named categories. GE is ranked among the top ten largest firms in the US in terms of gross revenue. The 2011 annual reports of GE reported a total asset base of $ 717,242 million and $ 66,875 million in revenue.
GE has been selected as a point because of the diversity and magnitude of its financial operations; I expect to gain more understanding of financial issues after the financial analysis of this company. This paper will explore the financial aspects of the GE and discuss its financial position based on some ratios. The analysis will be based on four main aspects; the company profitability, Leverage, Liquidity, and company efficiency. Some ratio calculations and charts will be used to explain the company progress in terms of its financial perspective.
- Company profitability
A profitability ratio indicates the net income of the company with respect to the generated revenue. The total revenues of the GE reduced from 2008 to 2010 but increased again in 2011. The graphical representation of this is shown below.
- Net Profit margin
The profit margin is an important ratio used to calculate the company profitability. It is calculated by dividing the net income by net revenue.
Profit margin = net sales/net revenue
This ratio measures the company’s ability to controls its cost of production. GE has been recording an increasing trend in its profit margin since 2009. See the below figure;
In 2011, the profit margin was 21.6%. This implies that 26.6% of total revenue was retained by the company as profits while the remaining bit was used as costs of sales. Out of $1 of sale, the company retained $0.216 as profit. The rising trend of the profit margin from 2009 imply that either GE has been experiencing a decline in its cost of production per unit or the selling cost per unit has been rising. It is likely that the company rising profit margin is a result of relatively cheaper supplies than the previous year. Another likely cause could be increase in company efficiency by increasing its product while the fixed costs remained constant thus reduce overall production cost.
- GE Leverage measure
The company leverage is the measure of the level of equity and debt used to finance capital. Debt-to-capital ratio is used to establish the measure of a company’s leverage. Other related ratios that can be used to calculate the company’s leverage include; equity ratio, debt-equity ratio, and liabilities-to-assets ratio. The debt-to-capital ratio is calculated by dividing total debt by total capital. Total capital is total debt plus total assets.
Debt-equity-ratio = total debt/total equity
Total capital = total debt + total equity
GE debt-capital ratio has been declining from 2008 to 2010 then insignificantly rose in 2011 (with a very small margin of 0.1%). The reducing trend is an indicator that the company is increasingly using equity as a way of financing its operations rather than debt. The benefit of using more equity than debt is that the company avoids charges associated with debt like interest rates. There is also low risk of defalt when more equity is used to fund operations.
2008 experienced the highest Debt-to-capital ratio with 85.8%. The company financial structure is interpreted to comprise 85.8% of the total capital being financed by debt while the remaining 13.2% is being financed by equity. This means the company has a weak fincial strenghth and higher default risk because more than 80% of the capital is financianced by debt. A more analytical perspective and conclusions can only be drawn when other companies’ statistics in the same industry are available.
- GE liquidity
The GE liquidity will be measured by use of current ratio. The liquidity of a company involves establishing the company’s ability to meet its short-term obligations. There are some other ratios other than the current ratio that can be used to establish the company’s liquidity for instance, the acid test ratio. Current ratio is calculated by dividing the current assets by the current liabilities.
Current ratio = current assets/current liabilities
The figures below show changes in current assets and current liabilities. The next figure shows the trend of the current ratios from 2008 to 2011.
The current ratio for all the four years was more than one. That indicates that the current assets in the GE Company were more than current liabilities throughout the four year period. Usually, a current ratio of less than one indicates a poor financial health of a company. This does not mean the company can become bankrupt because it can always seek alternative financing options like bank overdrafts to offset the current obligations.
The highest current ratio GE Company ever recorded was 2.59 (in 2009) and lowest current ratio 1.79 (in 2011). The 2009 current ratio indicated that the current assets totaled more than twice the current liabilities. The assumption of the current ratio is that the current assets will be readily available to offset the current obligations. GE is in good financial health because it can easily pay the short-term liabilities promptly (based on calculated figures).
- GE Efficiency measurement
The efficiency of GE Company can be determined by calculating; return on Assets ratio (ROA), asset turnover ratio, accounts receivable turnover, and accounts payable turnover. We will establish the efficiency of GE based on Return on Assets Ratio (ROA). ROA is calculated by dividing net income by total assets of the company. The four year period ROA is calculated and graphically represented below.
Return on Assets = Net Income/ Total Assets X100%
The graphical representation depicts a rising trend in ROA from 2009 to 2011. In 2011, return on assets was 2% indicating that the company made a profit which was approximately 2% of its total assets. We cannot exactly determine whether this was efficient because we at least need statistics from other companies in the same industry and with same financing structure for comparison purpose. If the ratio is less than the industry average then it will be considered less efficient.
Investors prefer companies with high ROA because that means the company is able to use minimum resources to yield maximum income. High ROA also directly imply that the incumbent management is highly efficient in mobilizing resources.
- Conclusion
The profitability and liquidity ratios of GE and the respective trends depict a financially healthy GE. The increasing profit margins insinuate that the company has a better control over its cost of production. The leverage of GE will however undoubtedly discourage a potential investor because it is quite high; that means the company may easily go into bankruptcy when unfavorable economic conditions persist. The Debt-to-equity ratio for the four years averaged more than 83% indicating capital was largely financed by debt. The good news however is that the ratio is showing a declining trend and may reach an admirable level after 4-7 years.
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