Executive Summary The following report illustrates the financial decisions and positions of the company General Electric GE during the fiscal year of 2006 Within the report are discuss

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Executive Summary The following report illustrates the financial decisions and positions of the company General Electric GE during the fiscal year of 2006 Within the report are discuss Powered By Docstoc
					Executive Summary

       The following report illustrates the financial decisions and positions of the company General Electric

(GE) during the fiscal year of 2006. Within the report are discussions that analyze certain aspects of GE’s

financial capabilities. These discussions include the analysis of their financial statements, ratio breakdown,

sales forecast, assessment of risk, financial reconstruction, and recommendations to management.

       The “Financial Statement Analysis” includes a detailed review of GE’s balance sheet, income statement,

and statement of cash flows of 2006, while interpreting certain monetary ratios that apply to each statement.

The discussion about debt, financial leverage, company growth, the company’s net worth, working capital,

profitability, ability to service debt, and investing strategy are included in these sections.

       The “Ratio Analysis” segment contains calculated ratios with detailed explanations to help better

understand the performance of GE. Profitability ratios include descriptions of the profit margin, return on

equity, and return on assets. Activity ratios illustrate ratios such as, inventory turnover, average collection

period, sales to fixed assets, and total asset turnover. The leverage ratios provide several important ratios such

as assets to equity, debt to assets, debt to equity, interest coverage, cash flow to long term debt, and long term

debt to equity. The valuation ratios include dividend yield, dividend payout, price to earnings, price to cash

flow, and the price to book ratio.

       The “Sales Forecast” is based on a Pro Forma forecast for the year 2007. This “what if” scenario will

allow investors and managers to decide which assumption will better fit the company with information

provided. The “Risk” segment notes how confident GE is from a financial standpoint. Debt, interest rates, and

tax policies are taken into consideration in this portion of the report. “Financial Restructuring” is essentially a

recap of General Electric’s Pro Forma forecast statement. What will GE be required to renovate in order to

maintain financial stability? “Recommendations” discusses General Electric’s strengths and weaknesses as a

company all together. This leads into the debate of GE’s opportunities and threats. The following report will

provide useful information for an investor to better understand the mechanics of how General Electric

performed in the fiscal year of 2006 and how they might operate in the future.
The Balance Sheet

The Balance Sheet – Balance Sheet Ratios

   The financial statements of a firm outline the financial health of the firm. General Electric’s balance sheet

like all other companies balance sheet is a financial snapshoot in time of the present assets the company owns

and the claims against those assets. The financial leverage of the General Electric is first determined comparing

the book value of the company’s liabilities to the company’s book value of its assets or equity.

   The book value of a company is cost based, in that, it is based upon the cost of assets bought in the past and

often do not render information about any future income the company’s assets might generate. Equity

shareholders who invest in General Electric are expecting a return on their investments. Many of their assets

and liabilities do not appear on the current balance sheet – such as the company’s most valuable commodity –

the employees, or the impending lawsuits. General Electric’s 2006 book value is the value of the shareholders’

equity $112,314,000.

 Minority interest in equity of consolidated                                           7,578

 affiliates (note 22)

 Common stock (10,277,373,000 and 10,484,268,000

 shares outstanding at year-end 2006 and                                                 669

 2005, respectively)

 Accumulated gains (losses)     - net

 Investment securities                                                                 1,608

 Currency translation adjustments                                                      6,181

 Cash flow hedges                                                                      (129)

 Benefit plans                                                                       (4,406)

 Other capital                                                                       25,486

 Retained earnings                                                                  107,798

 Less common stock held in treasury                                                 (24,893)

 Total shareowners equity (notes 23 and 24)                                         112,314
   Working Capital is the current assets minus current liabilities. This measures the assets liquidity within

the company. When working capital illustrates a positive number then the company has the ability to expand

and improve itself. Meanwhile, if the company’s working capital is negative, the company lacks the necessary

funding to grow.

       General Electric’s working capital is its Current assets $87,456,000 minus its current liabilities

$220,514,000 which equals ($133,058,000). General Electric has the potential to reinvest within itself or to

make further ventures.

       Debt is simply that which is owed to someone else. It allows a company to do something that it is not in

the position to do. Debt is incurred when investors invest into the company or the company use external

financing to finance a project.

General Electric’s debt is measured in two ways:

   1. Debt-to-assets ratio

           a. This is defined as Total Liabilities divided by Total Assets.

           b. Total Liabilities       =              $432,957,000

           c. Total Assets            =              $697,239,000

           d. Debt-to-Assets          =      62%

The money that pays 62%% of General Electric’s assets is derived from its creditors.

   2. Debt-to-equity ratio

           a. This ratio is defined as Total Liabilities divided by Shareholders’ Equity

           b. Total Liabilities       =              $432,957,000

           c. Shareholders’ Equity =                 $112,314,000

           d. Debt-to-equity          =      3.85
This ratio indicates that General Electric’s creditor supply $385.00 cents for every dollar supplied from its


       Financial Leverage is the degree at which an investor or business uses borrowed money to finance their

projects. This leverage has the added benefit of increasing shareholders’ ROI.

Financial Leverage is calculated by taking the Shareholders’ Equity divided by the Total Debt of the company.

General Electric’s financial leverage is:

       1. Shareholders’ Equity                =                $112,314,000

       2. Total Debt                          =                $432,957,000

       3. Financial Leverage                  =       3.85


       Growth is defined as the maximum rate at which a company’s sales can increase without depleting

financial resources. The growth of sales is certainly limited by the rate by which owner’s equity continues to

increase – seen as the growth rate in equity. We shall acknowledge that General Electric is in its maturity stage

of growth. Sustainable Growth Rate is equal to the product of the following ratios:

                  (Profit Margin) X (Retention Rate) X (Asset Turnover) X (Assets/Equitybop)

       Retention Rate is determined by taking the Net Income minus Dividends then divided by Net Income.

Retention rate is the portion of the net income that is not paid out as dividends.

Profit Margin               Net Income                       $20,829,000
                         Net Sale Revenue                  $163,391,000
Retention Rate             Net Income -                $20,829,000 - $2,878,000

                             Dividends                       $20,829,000              0.86                         Gen

                            Net Income                                                                   eral


Asset Turnover                Revenue                        163,391,000                                 debt is
                               Assets                       $697,239,000                                 increasing

                                                                                                         from year

Assets / Equitybop                                          $697,239,000                                 to year as
                                                            $109,351,000                                 seen in the


Growth Rate                                                                          0.016               statements

                                                                                                         – Balance



       The company’s net worth is a determining factor for credit-worthiness. Net worth gives the investor a

snapshot of the company’s investment history.

General Electric’s net worth is determined by subtracting its Total Assets from its Total Liabilities.

       Total Assets           =                $ 697,239,000

       Total Liabilities      =                $ 432,957,000

       Net Worth              =         $264,282,000
Income statement

        GE’s income statement from the last three years can be found on Table 1 for further analysis. When

looking into a company, it’s very important to understand how their income statement shows their profitability

and if they can adequately finance their debt. Analyzing certain ratios will give better understanding to the

company’s profitability. The income statement’s profitability ratios include profit margin, gross margin, and

price-to-earnings. Other ratios are included such as, return on equity (ROE) and return on assets (ROA) can be

found in the report’s “Ratio Analysis” section on page 7.

        The profit margin ratio is particularly important because it reflects their pricing strategy and how well

they can control their operating costs. GE’s profit margin is 13% which is decently high (calculated Net

Earnings / Sales). Keep in mind that a high profit margin doesn’t necessarily mean it’s better than a low profit

margin company. Profit margin is correlated with the company’s asset turnover. Therefore, a high profit

margin tends to be followed by a low asset turnover. GE’s asset turnover is 0.14, a significantly low turnover.

All this means is GE demands a high profit margin because they add considerable value to products.

        GE’s gross margin will show how much of its sales dollars is a contribution to fixed costs and, more

importantly, their profits. GE’s gross margin is about 23% (calculated Gross Profit / Sales). This means that 23

cents of every dollar coming in from sales is accessible to pay for fixed costs and ultimately add to their profits.

The last ratio to look at for GE’s income statement is the price-to-earnings ratio which regulates stock prices for

their different earnings levels. GE’s price-to-earnings is $7.64 (calculated price per share / earnings per share).

This means that investors were paying $7.64 per dollar of GE’s earnings. These ratios can help better

understand GE’s profitability, but the question of servicing debt is another question itself.

        Before investing into a company it’s important to understand if that company can adequately service its

own debt. When looking at GE’ income statement it’s easy to see that their total costs and expenses are steadily

rising from year to year. However, their total revenues are steadily rising as well. This trend is shown in their

Net Earnings. The trend of their Net Income is rising which tells us that they are very capable of servicing their


Cash flow statement
       GE has the highest financial rating of AAA and has the capacity to meet its commitment on obligations

(www.ge.com/). The high financial rating can be supported by looking at their liquidity ratios. The current ratio

supports GE’s financial rating and shows they are able to cover their current debt. In addition the acid test

shows GE has assets that can be quickly converted to cash if necessary to fulfill its commitment on obligations.

By maintaining a strong working capital it indicates GE is financially secure which helps them to maintain the

highest of financial ratings. GE has been successful in their investing strategy by focusing primarily on fixed

assets, specifically property, plant, and equipment. Their financial strategy has been effective because they have

enough cash and liquidity to cover their obligations and debt. Their strategy is also effective because they are

producing strong revenues and consistently turning a profit.

Ratio Analysis

Liquidity Ratios

       The current ratio is used to determine whether or not a company has enough resources to pay it debt for

the next twelve months. It uses a comparison of the company’s current assets and current liabilities to form the

equation: Current ratio= current assets/ current liabilities. If the ratio is below 1 it signals that the company may

be in trouble. While acceptable ratios vary industry to industry a company does not wan to have current

liabilities that exceed current assets. GE has a little bit low ratio of 0.40 which indicates that it will have no

problem paying its debt in this period.

       The Acid test is used to measure a company’s ability to use current assets to cover current liabilities.

These assets are ones that can be quickly converted into cash, also known as liquidation. This ratios purpose is

to compare cash and short term investments to the company’s financial liabilities within a 12 month period. It is

calculated as Acid test= (current assets-inventory-prepayments)/(current liabilities). This is another ratio that

varies by industry but typically should be 1:1 or better. GE has a decent ratio of 0.34.

       Working capital is a simple calculation of current assets minus current liabilities. This financial measure

is used to determine how much liquidity is available to the business on a day to day basis that can be converted

to cash. GE’s working capital is ($133,058,000). They are in trouble with their working capital. If a company’s
working capital is negative it indicates they are unable to meet short term liabilities using current assets. In the

worst case scenario of a negative working capital a company could be at risk of bankruptcy.

Profitability Ratios

       To determine net profit margin the calculation is net income divided by net sales. GE’s net profit margin

is 121 and is most useful for internal comparison within a company. This ratio indicates whether or not a

company is pricing efficiently and managing its costs.

       Return on Assets (ROA) is a percentage that shows how profitable a company’s assets are and their

contribution to revenue. The ratio is calculated as ROA=net income/ total assets and tells the company how

many dollars of revenue are derived from each dollar of assets that the company posses’. ROA is tough to

compare across different industries but can be used among companies competing within the same industry.

GE’s ROA is 23.8% showing their profitability before leverage.

       Return on Equity (ROE) is an important financial ratio because it measures return on shareholders

equity. ROE determines how efficient a company is at generating profit from every dollar of net assets and

shows if the company invests that dollar in a way that generates earnings growth. ROE is calculated by taking

the net income and dividing it by the total equity. GE’s ratio turns out to be 18.55%. ROE like many other ratios

cannot be compared across multiple industries, and is only useful when looking at competitors. GE’s ROE is

pretty typical for their market.

Active Ratios

Inventory Turnover

       Inventory Turnover is calculated in two steps. First, calculate the number of times turned over by

dividing Cost of Goods Sold by ending inventory. GE has $50,588,000 in Cost of Goods Sold and $11,401,000

in ending inventory, which gives them 4.4371546 times it turns over. Then divide 365 by # of times inventory is

turned over which is 4.4371546, therefore the inventory turnover is 82.2 days. This is a fairly high inventory

turnover ratio. Inventory is turned over every 82.2 days, therefore GE has strong sales.
Average Collection Period

        The Average Collection Period is determined by dividing Accountings Receivable by the credit sales per

day. GE has $13,954,000 in Accounts Receivable by credit sales per day $176,156. Their Average Collection

Period is 79.21 days. This measures the average number of days that it takes for their customers to pay their

bills. This shows that the customers at GE customers pay off their accounts receivable in approximately 79.21

days. The collection period is a little long but is realistic for the types of products they sell.

Sales to Fixed Assets

        Sales to Fixed Assets determine the fixed asset turnover ratio. To figure this out, Net Sales is divided by

Fixed Assets. GE’s net sales are $100,700,000 which is divided by their Fixed Assets, $74,966,000 and their

Sales to Fixed Assets equals 1.34. The higher the ratio the better because it means your business has less

money tied up in fixed assets.

Total Asset Turnover

        Total Asset Turnover is determined by net sales divided by total assets. GE has a Total Asset Turnover

of 0.14 and is determined by dividing $100,700,000(Net sales) / $697,239,000(Total assets). This measures how

well the assets are being used to create revenues. It shows how much revenue GE makes from their total assets.

Leverage Ratios Analysis

Assets to equity ratio

        This is found by dividing the company’s assets by the shareholders equity. This ratio is a key indicator

of the company’s leverage. The assets to equity ratio compares the company’s assets to the portion of the

company owned by those who have invested in the company. They are astutely using the shareholders equity to

finance assets.

Debt to Assets Ratio

        The debt to equity is obtained by dividing total assets by total liabilities. A high debt to equity can be

very risky for a company. If investors see that a company is taking on to much they may pull their investments

from the company. A high debt to asset ratio may also be a deterrent for potential investors. With General
Electric’s debt to asset ratio they show they are financed more by equity than debt. General Electric’s DCebt to

Assets Ratio is 0.62.

Debt to Equity Ratio

       The debt to equity is found by dividing total liabilities by shareholders equity.

The company’s debt to equity tells you how much creditors supply for every dollar supplied by the company’s

shareholders. A High debt to equity means that the company’s growth has been heavily financed by debt. What

is considered high is dependent on the business the company is in. depending heavily on debt to finance the

company could lead to bankruptcy. For General Electric they are in a capital intensive industry there debt to

equity ratio is normal for their industry. They are a financially independent company and are not in danger of

over financing the company with debt. General Electric has a debt to equity ratio of 3.85.

Interest Coverage Ratio

       This is found by dividing EBIT by the Interest expense

The interest coverage ratio tells us how easily a company can pay interest on outstanding debt. The lower the

ratio the more the company is hampered by debt and can not meet their interest expenses. They have a interest

coverage ratio of 1.28.

Cash Flow to Long Term Debt Ratio

       The cash flow to long term debt is calculated by dividing the cash flow by long term debt. The cash flow

to long term debt ratio appraises the adequacy of available funds to pay obligations. GE’s score .1195 shows

they are financially stable and are able to pay back their debt.

Long Term Debt to Equity

General Electric’s long term debt to equity is 2.32. The long term debt to equity shows how much a company

can safely borrow over long periods of time.

Valuation Ratios

Dividend Yield

The dividend yield ratio for GE is 6.7%. This is calculated by:
Dividend Yield = Annual Dividends Per Share / Price per Share

       The dividend yield ratio shows how much a company pays out in dividends each year relative to its

share price. Dividend yield is a way to measure how much cash flow you are getting for each dollar invested in

dividends. GE’s dividend yield is stable and well.

Dividend Payout Ratio

The dividend payout ratio for GE is .50026. This is calculated by:

Dividend Payout = Yearly Dividend Per Share / Earnings per Share

       The dividend payout ratio is the percentage of earnings paid to shareholders in dividends. The payout

ratio provides an idea of how well earnings support the dividend payments. More mature companies tend

to have a higher payout ratio, which is why GE’s dividend payout ratio is good.

Price to Earnings Ratio

The price to earnings ratio for GE is $7.64. This is calculated by:

Price to Earnings = Market Value Per Share / Earnings Per Share

       The price to earnings ratio is a valuation ratio of a company's current share price compared to its per-

share earnings. In general, a high P/E suggests that investors are expecting higher earnings growth in the future

compared to companies with a lower P/E. GE’s price to earnings ratio is pretty good.

Price to Cash Flow

The price to cash flow ratio for GE is $5,151.86. This is calculated by:

Price to Cash Flow = Share Price / Cash Flow Per Share

       The price to cash flow ratio is a measure of the market's expectations of a firm's future financial

health. GE’s price to cash flow is good.

Price to Book Ratio

The price to book ratio for GE is 7.7. This is calculated by:

Price to Book Ratio = (Market Capitalization + Debt) / Appraised Value of Assets

       The price to book ratio is a measurement used to compare a stock's market value to its book value. A

lower price to book ratio could mean that the stock is undervalued or that there is something fundamentally
wrong with the company. This ratio also gives some idea of whether you're paying too much for what would be

left if the company went bankrupt immediately. GE’s price to book ratio is pretty well off.

Sales Forecast:
Year                           2006 Actual         2007           2008        2009    2010         2011

Net Sales                            163,391

Growth rate in net sales                             15.00%        15.00%   18.00%      21.00%       24.00%

Cost of goods sold/net sales                         30.96%        30.00%   29.00%           28%          27%

Gen., Sell., and Admin

Expense/Net Sales                                    40.35%        40.00%      38%           36%          34%

                                               $              $

Long-term debt                       432,957 435,000          440,000       450,000     460,000      470,000

Current portion long-term                      $              $

debt                                 260,804 270,000          260,000       250,000     248,000      247,000

Interest rate                                        20.00%        20.00%       20            20           20

Tax rate                                             16.10%        16.00%       16            16           16

Dividend/earnings after tax                          50.42%        50.00%       50            50           50

Current assets/net sale                              86.84%        86.00%       85            85           85

                                               $              $

Net fixed assets                               74,966.00      75,000         76,000      78,000       80,000

Current liability/net sales                         135.00%       130.00%      125           120          115

Owner's equity                       112,314

                                             FORECAST   FORECAST    FORECAST        FORECAST        FORECAST

Year                         EQUATIONS           2007       2008        2009            2010            2011

                                             $          $          $               $               $

Net Sales                    B3+B3*C4       187,900     187,900    192,801         197,703         202,605

                                             $          $          $               $               $

Cost of Goods Sold           C5*C19         58,174      56,370     55,912          55,357          54,703

                                             $          $          $               $               $

Gross Profit                 C19-C20        129,726     131,530    136,889         142,346         147,902

                                             $          $          $               $               $

Gen., Sell., and Admin Exp   C6*C19         75,818      75,160     73,265          71,173          68,886

                                             $          $          $               $               $

Interest Expense             C9*(C7+C8+C40) 28,416      27,986     (149,814,504)   (133,965,577)   (117,116,304)

                                             $          $          $               $               $

Earning Before Tax           C21-C22-C23    25,492      28,384     149,878,128     134,036,750     117,195,320

                                             $          $          $               $               $

Tax                          C10*C24        4,104       4,541      2,398,050,055   2,144,588,002   1,875,125,118
                                  $     $     $         $         $

Earning after Tax       C24-C25   156   157   156       156       156

                                  $     $     $         $         $

Dividends Paid          C11*C26   79    79    7,800     7,800     7,800

Additions to Retained             $     $     $         $         $

Earnings                C26-C27   77    79    (7,644)   (7,644)   (7,644)

                                      $         $         $            $            $

Current Assets          C12*C19       163,172   161,594   16,388,117   16,804,764   17,221,411

                                      $         $         $            $            $

Net Fixed Assets        C13           74,966    75,000    76,000       78,000       80,000

                                      $         $         $            $            $

Total Assets            C31+C32       238,138   236,594   16,464,117   16,882,764   17,301,411

                                      $         $         $            $            $

Current Liabilities     C14*C19       253,665   244,270   24,100,173   23,724,373   23,299,557

                                      $         $         $            $            $

Long-term Debt          C7            435,000   440,000   450,000      460,000      470,000

                                      $         $         $            $            $

Equity                  B15+C28       112,391   112,393   104,670      104,670      104,670

Total Liabilities and                 $         $         $            $            $

Shareholders Equity     C35+C36+C37   801,056   796,662   24,654,843   24,289,043   23,874,227
External Funding             $           $           $             $             $

Required           C33-C38   (562,918)   (560,068)   (8,190,725)   (7,406,279)   (6,572,815)
   •   Project Sales (1 year out) using OLS Regression for last 5 years of sales…

               2007    11945.37     $171,987.80        Projected Sales 2007


               2008 23802373        $183,933.17        Projected Sales 2008

   The Pro Forma forecast for year 2007 for external funding is -560,557 millions, states that General Electric

is able to finance its project through retained earnings.

   The sensitivity of the forecast is measured in the “what if” scenario. Managers now have the ability to

determine which assumption will better suit their projected forecast from the information that is already

gathered. For example, what if we had used 15% for a growth rate in net sales instead of 12%, net sales forecast

would change from $182,998 millions to $187,900 millions. This is a small change of a little more than $5

billion. External funding required increased from – $60,557 millions to -$562,918 millions.


       General Electric is a mature company from a financial standpoint. They have both increasing debt as

well as increasing equity. The rate at which these are increasing is relatively balanced and appears to be

occurring at a sustainable rate. General Electric is sensitive to interest rates, as all businesses are. When interest

rates are low it promotes growth for companies. When interest rates are high it limits GE’s ability to borrow

money because it is more costly. This also relates to tax policy changes. If corporations are taxed more heavily

then it limits their business growth and cuts into their retained earnings. As policies become more liberal then

corporations have the ability to grow the economy through their own business decisions.
Financial Restructuring

       General Electric does not need to worry about restructuring in terms of debt and refinancing. Their debt

to equity ratio is acceptable because of the capital intensive industry they operate in. Looking at the pro forma

General Electric is able to finance themselves so there is not reason to change the current structure they are

operating within. Because they are not having finance issues there is no need for additional equity to support

their business at this time. As long as GE stock maintains value in the perception of the market there is no

reason for a dividend to be paid. As a mature company GE may need to pay some dividends from time to time

to stimulate stock interest but all payouts should remain modest.


         General Electric has much strength, they are a diversified business and they have leading market

position. Their revenues are distributed throughout their many operating segments. “General Electric is one of

the most diversified corporations in the world” (Datamonitor). This diversification protects General Electric

from the fluctuations in demand in specific markets. It also helps to reduce the business risk. Their

infrastructure has grown tremendously, with revenue growth of 11.3 %. They have very strong position in the

market in most of their market segments. They are the market leader in the global power systems market. This

market includes gas turbines and steam turbines.

         Every business, no matter how strong, has their weaknesses. They are having weak profitability in two

of their main divisions. Their infrastructure and industrial division has been declining. The decrease in margin

in those two segments will decrease overall profitability. Also the ratings of the NBC Universal have been

declining in the last year, which affects the business as a whole.


       General Electric has an opportunity to capitalize on the global infrastructure industry. It is expected to

accelerate in growth especially in developing countries. These markets, like India, will most likely boost

revenue for General Electric over the next few years. Another opportunity for General Electric is in the area of

environmentally friendly technologies. The company is currently researching and developing products that will

have low greenhouse emission gases, and has set goals to reduce their imprint on the environment. They have
already created the H-turbine as one of the most efficient gas turbines in the world, reducing almost one

millions tons of greenhouses gases over its lifetime. Each of these opportunities will benefit GE in the future

and help them to increase their brand image.


       While General Electric is working toward producing environmentally friendly products one threat that

will set them back is the accusation of polluting the Hudson River here in the United States. GE has been

accused of dumping polychlorinated biphenyls back in the late 1970’s. This substance is very harmful to

peoples health and causes cancer in animals. Clean up has been discussed but press on such acts damage GE’s

reputation and brand image which could have a future impact on the profitability of the company. Another

threat GE has to deal with is steel prices. As a large consumer of steel the price has a strong impact on the

companies operations. The steel industry fluctuates and the price varies on a continual basis. This is a constant

threat to GE because when prices are high, or on the rise, it has a direct impact on profit margin (Datamonitor,


Description: Financial Statement Ge document sample