Introduction to General Electric Company
The General Electric Company is a multinational corporation with operations across more than 170 countries (Welch & Byrne, 2001). The company deals in the design and production of various electric equipment including motors, engines, and power generators among other products. GE has been in operation for more than a century and over the years, the MNC has accumulated experience in power generation, lighting, and other activities and this makes it one of the greatest industrial companies across the globe. In its 2015 release of financial report, the company branded itself as a digital industrial company pointing to the increased innovation and research endeavors that the company has been focused on in the recent (General Electric, 2015).
Having a great name and brand such as GE contributes to good financial performance. However, the brand recognition and fame alone does not imply that the company performs well financially hence the need to conduct the analysis of the company’s financial statements. This report presents the findings of the analysis of GE’s financial statements. The analysis focused majorly on the income statement and the statement of financial position. Common size statements were developed and forecasting done to produce the 2016F statements. Where necessary, recasting of the financial statements (specifically the income statement) was done in order to provide a more detailed picture of the financial performance of the General Electric Company. The findings of financial statements analysis are as presented in the various tables and discussions below.
Financial Statement Review
Review of Income Statement
A first glance at the income statement of income for General Electric Company indicates that the company made a loss of 5.795 billion in 2015 compared to an income of 15.344 billion in 2014. This raise a red flag considering that no one would expect such a high variance. Further scrutiny of the statements indicates that the company discontinued operations in some areas and this resulted in heavy losses for the company. However, the analysis also indicates that in its reporting the company did not separate the revenues from core operations from other revenues and gains on revaluation of capital assets (General Electric, 2015). Consequently, it was difficult to determine the gross profit margin, which is an important indicator of the company’s profitability. Due to the limitations of the income statement posted by the company, it was important to recast the items of the income statement to aid in further analysis of the company’s performance. The reorganized statement of income is as presented below.
Analysis of the recast income statement indicates that GE consistently reported losses from operating activities. The losses were determined by deducting the operating expenses from the gross profit. However, after including the net income and revenues from non-operating activities other than the discontinued operations, the report indicates that the company is profitable. These indications point to the fact that the company has been going through a difficult period in time with regard generation of positive income from operations (Berk & DeMarzo, 2007). Nonetheless, the company is able to meet its variable costs as indicated by the positive gross profit hence no need to worry about the company’s future sustainability.
Common Size Income Statement
The common size income statement provides more details concerning the performance of the company. According to the analysis, the COGS amount to 80% of the sales revenues from the sale of goods. This paints the picture of a business, which is capital intensive, and consequently, the company would be required to master new ways of controlling the direct costs, which are labelled in the income statement as cost of goods sold. Reducing the COGS would enable the company positive PBT.
Review of the Statement of Financial position
The table above presents the company’s statement of financial position. The key items identified in the statement include the assets, the liabilities, and the shareowners equity. From the common size statement of financial position below, the total shareowners, equity is proportionate to 79% of the total assets. The company’s long-term borrowings are proportionate to 29% of the total assets. This indicates that the company majorly funds is assets through equity and long-term debt instruments. Further, the analysis also indicates that the company still holds assets from discontinued operations that are valued at 39% of the total assets. Other items of the statement of financial position are as shown in the common size statement below.
Common size statement of financial position
Pro forma Financial Statements for 2016
This section presents the pro forma financial statements for the General Electric Company. The forecasts were based on the common size ratios presented above and also on the assumption that the growth rate will be at 10% for both assets and the sales of the company. The expected income and balance sheets are as presented below.
Pro Forma Income Statement assuming that the common size ratios remain constant and that the total sales will grow by 10% over the forecasting period.
Pro Forma Statement of Financial Position assuming that the common size ratios will remain constant over the forecasting period and that the assets will grow by 10%.
Ratio Analysis
This section presents ratio analysis for the General Electric Company. The computed ratios fall under four categories which include the liquidity ratios, the financial leverage ratios, the asset management ratios, the profitability ratios, and the market value ratios.
According to the ratio analysis, the company’s liquidity position is considerably strong considering that both the current ratio and the quick ratio are above 1.0. However, the cash ratio of the company is a little weak considering the fact that it is below 1.0. Nonetheless, the cash ration improved over the period in focus hence indicating an improving cash position.
The financial leverage ratios indicate the extent to which the company is funded by debt (Temte, 2004). The two ratios computed herein include the debt to equity ratio and the degree of financial leverage. The ratios improved commendably over the period in focus with the debt to equity ratio falling to 3.96 from 4.04 and the DFL increasing to 1.73 from 1.36. This indicates that the firm is not at risk of insolvency.
The asset management ratios indicate how efficiently the company manages its assets. The total assets and the accounts receivable were the two assets highlighted in this analysis and according to the analysis, the total assets turnover ratio improved commendably over the period. Further, the receivables turnover also improved. Despite these improvements, the profitability of the company as indicated by the ROA and the ROSE remained static over the period. The EPS reduced slightly from 0.7 to 0.6 while the P/E deteriorated to 49.94 from 42.70 in the previous year.
DuPont Analysis
Economic Value Added
Synopsis of Findings and Recommendations
Based on the analysis presented herein, I would not recommend a buy on the General Electric Company shares. This is because the analysis indicates that the shares of the company are more expensive that they were a year ago. This is indicate by the P/E that deteriorated from 42.7 to 49.94 over the period. The deterioration in the P/E was not supported by any fundamentals of the company considering that the EPS remained static over the period and also considering the fact that the general profitability of the company did not improve over the period (Helbæk, Lindest & McLellan, 2010). Further, the DuPont analysis indicates that the firm’s gross did not increase commendably over the period.
References
Berk, J. B., & DeMarzo, P. M. (2007). Corporate finance. Boston: Pearson Addison Wesley.
General Electric. (2015). GE 2014 Annual report: A New kind of industrial company. Retrieved from https://www.ge.com/ar2014/assets/pdf/GE_AR14.pdf
General Electric. (2015). GE works: 2013 annual report. Retrieved from http://www.ge.com/ar2013/pdf/GE_AR13.pdf
Helbæk, M., Lindest, S., & McLellan, B. (2010). Corporate finance. New York: McGraw-Hill.
Moles, P. (2011). Corporate finance. Hoboken, NJ: Wiley.
Ross, S. A., Westerfield, R., & Jaffe, J. F. (2005). Corporate finance. Boston: McGraw-Hill/Irwin.
Temte, A. (2004). Financial statement analysis. La Cross, WI: Schweser Study Program.
Welch, J., & Byrne, J. (2001). Jack. New York: Warner Books.
