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’
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
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
Assets / Equitybop $697,239,000 to year as
$109,351,000 seen in the
Growth Rate 0.016 statements
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
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.
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.
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.
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
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.
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.
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.
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,