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-General Electric -General Electric Document Transcript

  • General Electric: Financial Analysis Anthony Arola, Nathan Gadberry, Suzanne LeMere, Trinity Gibbons, Landon Heidenreich Finance for Managers, BUSA 302 Professor Wolf December 10, 2007
  • Table of Contents Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Business Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 The Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 The Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Ratio Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Liquidity Ratios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Profitability Ratios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 Activity Ratios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Leverage Ratios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Valuation Ratios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Sales Forecast. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 Risk Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 Financial Restructuring. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Discussion Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 Recommendations to Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 2
  • Executive Summary GE has been in business for over a hundred years. They are a large slow-growth company. Their ROE is 18.5%, while ROA is 3%. ROA is relatively low, however, this is not surprising given the type of industry they are in, like building nuclear reactors. They have strong financial leverage at 6.2%. Our regression analysis forecasts that the sales growth for GE will be 5.2% in 2007, and 6.9% in 2008. Their sustainable growth rate is approximately 9%. One of the ways they could increase their growth rate potential is to change their retention rate, which is a little less than 50%, however this might not be an option for them as one of the ways they’re able to attract new investors is by paying dividends. One area of weakness appears when a current ratio is calculated. The typical acceptable standard is 2:1, but GE’s is very small at .40. Generally this is a red flag to investors, because incase of failure, the company would be unable to pay off its obligations. However, in the case of GE, two important factors must be taken into consideration. (1) GE is a large and mature company that has a fairly predictable and reliable revenue stream, and (2) the company is involved heavily in financial services, which means their physical assets alone understate the value of the company. Also, none of the financing receivable were calculated as part of the assets, as we considered them long term. For these reasons, the small ratios are not as big as a concern as they would be for a different company. 3
  • Company Overview General Electric was created in the year 1892 when Edison General Electric Company formed with it competitor, Thomson Huston Company. Since that time General Electric has grown into a worldwide multi billion dollar organization that leads many fields in both research and development. GE is often at the forefront in industries that include transportation, electronics, broadcasting, and energy. General Electric has around 390,000 employees, who work in 215 manufacturing plants throughout the United States with an additional 80 manufacturing plants in 20 other countries. They run a “highly decentralized company with over 300 operating departments.” There are about 60 managers who supervise these departments which are organized into 10 groups. A nineteen member board of directors elects the corporate executive officers. It is these officers that determine the overall strategy of the company and determine its policies. The board of directors is determined by the 530,000 shareholders who hold 182,147,498 shares of voting stock within the company. Nuclear? General Electric is one of the few companies that have the ability and the resources to put together a nuclear reactor. With all the talk about global warming and the energy crisis that we have in today’s world, nuclear energy has huge growth potential. There are only a few companies that can provide this form of energy, General Electric being one of them. So we will pay special attention to General Electric and see if it is a good company to invest in. Since it is difficult to get the financials from General 4
  • Electric’s energy department we will be doing an analysis on the entire company in hope of determining whether or not it will be a profitable to invest in. Financial Statement Since the financial statements often can disclose information about the company that on first glance would not be obvious, we will closely examine the financial statement in order to gain a better understanding of General Electric’s financial position. The Balance Sheet At December 31 (In millions, except share 2006.00 2005.00 amounts) ASSETS Cash and equivalents $14,275 $8,825 Investment securities (note 10) 47,826 42,148 Current receivables (note 11) 13,954 14,851 Inventories (note 12) 11,401 10,474 Financing receivables - net (notes 13 and 14) 334,205 287,639 Other GECS receivables 17,067 14,332 Property, plant and equipment - net (note 15) 74,966 67,528 Investment in GECS 0 0 Intangible assets - net (note 16) 86,433 81,630 All other assets (note 17) 97,112 84,828 Assets of discontinued operations (note 2) 0 61,066 Total assets $697,239 $673,321 LIABILITIES AND EQUITY Short-term borrowings (note 18) $172,153 $158,156 Accounts payable, principally trade accounts 21,697 21,183 Progress collections and price adjustments 5,248 4,456 accrued Dividends payable 2,878 2,623 Other GE current liabilities 18,538 18,552 Long-term borrowings (note 18) 260,804 212,281 Investment contracts, insurance liabilities 34,499 33,097 and insurance annuity benefits (note 19) All other liabilities (note 20) 46,884 39,833 Deferred income taxes (note 21) 14,171 16,208 Liabilities of discontinued operations 475 49,527 5
  • (note 2) Total liabilities 577,347 555,916 Minority interest in equity of consolidated 7,578 8,054 affiliates (note 22) Common stock (10,277,373,000 and 10,484,268,000 shares outstanding at year-end 2006 and 669 669 2005, respectively) Accumulated gains (losses) - net Investment securities 1,608 1,831 Currency translation adjustments 6,181 2,532 Cash flow hedges (129) (352) Benefit plans (4,406) (874) Other capital 25,486 25,227 Retained earnings 107,798 97,644 Less common stock held in treasury (24,893) (17,326) Total shareowners equity (notes 23 and 24) 112,314 109,351 Total liabilities and equity $697,239 $673,321 General Electric’s (GE) Net Tangible Assets, or Book Value, is $610,806(million) in 2006. They currently have $697,239 (million) in Total Assets, minus $86,433(million) in Intangible Assets which equals their current Book Value. This leaves us with the abstract value of all of the company's tangible assets, the nuts and bolts of General Electric (buildings, computers, telephones, and office chairs), looking very good. In 2006, GE’s current position is excellent. Their existing working capital is $112,314 (million). GE currently has $697,239 (million) in current assets and $584,925 in current liabilities. Compared to the industry standard, GE is in a very good position. In theory, the more working capital a company has the less financial strain that company will experience. GE is a very diverse organization. As we talk about debt, we discover that GE has an extreme amount of debt. Our group covered two very important ratios on the Balance Sheet; the Debt-to-Assets ratio and the Debt-to-Equity ratio. These ratios are the most common measures of financial leverage used to evaluate a company’s book value of 6
  • liabilities to the book value of assets or equity. If you would look at table 1, it will describe GE’s debt-to-equity ratio for 2004 through 2006. This ratio (520.79%) says Table 1 Debt-to-Equity Ratio Total Liabilities Shareholders' Equity 2006 $584,925 $112,314 520.79% 2005 $563,970 $109,351 515.74% 2004 $639,686 $110,821 577.22% that creditors supply $520.79 for every $1 supplied by shareholders. Because GE is a very large organization and it is extremely diversified, it does not bother us that they are that highly leveraged. GE is in the process of producing and marketing the Advanced Advanced Water Boiling Reactor Water Boiling Reactor. The ABWR design is already licensed in three countries: the United States, Japan and Taiwan. These reactors are extremely costly manufactured goods, and in order to produce it GE cannot rely on investors alone. The second ratio we looked at as we analyzed the balance sheet was the Debt-to- Assets ratio. Table 2 outlines GE’s Debt-to-Assets ratios from 2004 through 2006. This ratio states that in (2006) 83.89% of GE’s assets come from creditors of one type or another. Table 2 Debt-to-Assets Ratio Total Liabilities Total Assets 2006 $584,925 $697,239 83.89% 2005 $563,970 $673,321 83.76% 2004 $639,686 $750,507 85.23% 7
  • Market Capitalization is the total dollar market value of all of a company's outstanding shares and is calculated by multiplying a company's shares outstanding by the current market price of one share. GE’s shares outstanding are 10,277.4(million), and as of close of business on December 5th the market price of one share is $36.93. With those numbers GE’s current Market Capitalization is $37,954.38(million). The Income Statement For the years ended December 31 (In millions; 2006.00 2005.00 per-share amounts in dollars) REVENUES Sales of goods $62,336 $57,378 Sales of services 36,772 33,052 Other income (note 3) 2,690 1,764 GECS earnings from continuing operations 10,495 9,527 GECS revenues from services (note 4) 0 0 GECS commercial paper interest rate swap 0 0 adjustment Total revenues 112,293 101,721 COSTS AND EXPENSES (note 5) Cost of goods sold 48,808 43,870 Cost of services sold 23,891 20,945 Interest and other financial charges 1,834 1,432 Investment contracts, insurance losses and insurance annuity benefits 0 0 Provision for losses on financing receivables 0 0 (note 14) Other costs and expenses 13,841 13,279 Minority interest in net earnings of consolidated 673 784 affiliates Total costs and expenses 89,047 80,310 EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 23,246 21,411 Provision for income taxes (note 8) (2,580) (2,750) EARNINGS FROM CONTINUING OPERATIONS 20,666 18,661 Earnings (loss) from discontinued operations, net of taxes (note 2) 163 (1,950) NET EARNINGS $20,829 $16,711 8
  • Return on equity (ROE) reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet. A business that has a high return on equity is more likely to be one that is capable of generating cash internally. For the most part, the higher a company’s return on equity compared to its industry, the better Return on Assets. As shown in table 3, GE’s ROE is not as high as the industry average. Table 3: Return on Equity Company Industry Sector S&P 500 19.83 23.89 23.89 21.60 Where asset turnover tells an investor the total sales for each $1 of assets, return on assets (ROA) tells an investor how much profit a company generated for each $1 in assets. The return on assets figure is also a sure-fire way to gauge the asset intensity of a business. Table 4: Return on Assets Company Industry Sector S&P 500 3.08 6.42 6.42 8.72 Ratio Analysis Financial ratio analysis is the calculation and comparison of ratios derived from the information in a company's financial statements. The level of these ratios can be used to make inferences about a company's financial condition, its operations and attractiveness as an investment. For this project we developed a ratio analysis of General Electric Corporation using their year-end financial statements of 2006. From those statements we calculated each of the ratios listed below. Alone, however, those figures mean nothing, so we chose two other corporations to compare our figures too. 9
  • Koninklijke Philips Electronics (PHG) is one of GE’s direct competitors within its sector called conglomerates. Therefore comparison between the two should be a good measure as to how GE is doing compared to others in their industry. Other companies in this sector are 3M, Wesco, and Tyco. However, the initial focus of this project was to choose a company that was involved in the nuclear energy movement. For that reason we wanted to compare GE to one of the top companies in the nuclear field. We chose Exelon Corporation, who has the largest nuclear fleet in the nation, to represent the energy/utilities sector, in this analysis. Liquidity Ratios Liquidity ratios are used to determine the company’s ability to pay off short-term debts. The higher value the ratio indicates the larger margin of safety that a company has to cover short-term debts. For our analysis of GE we used three important liquidity ratios, and compared them with the two competitors to see how they stacked up. The ratios we used are: (1) Current Ratio: This ratio determines whether the company can pay their debts over one year’s time. 2:1 is considered an acceptable ratio. Current Assets / Current Liabilities (2) Quick Ratio/ Acid test: Measures how the company uses its quick assets to cover their current liabilities. It compares the company's cash and short-term investments to their financial liabilities that the company is expected to pay within the year. (Current Assets – Inventory )/ Current Liabilities 10
  • (3) Working Capital: This represents the day to day working liquidity within the company, available to that business. General Electric Ratio Calculations Result Current Ratio $87,456 / $220,524 .397 Quick Ratio (Acid Test) $87,456 – $11,401 .345 $220,514 Working Capital $87,456 – $220,514 ($133,058) Competitors Ratio Exelon Co. Philips Electronics Current Ratio .94 1.13 Quick Ratio (Acid Test) .81 1.51 In order to calculate GE’s liquidity ratios, we first needed to decide which of their assets and liabilities were current. After looking at their balance sheet, we inferred that the top four lines of their assets were current. They included, (1) cash and equivalents, (2) investment securities, (3) current receivables, and (4) inventories. By adding these four categories we came up with the current asset figure of $87,456 million that we used in all three liquidity ratios. We calculated the current liabilities as the top five lines on their balance sheet, i.e. (1) short term borrowings, (2) accounts payable, (3) progress calculations, (4) dividends payable, and (5) other GE current liabilities. By adding these five balance sheet lines together we established the $220,514 million figure that we used for our current liabilities. A current ratio of .397 seems very small, especially when you consider that a ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. The current ratio is also very close to the quick ratio, as they are only 11
  • different by .052. Intuitively, liquidity ratios this small would be a big red flag to investors, because in case of failure, the company would not be able to liquidate their assets and cover their costs. However, in the case of GE, two important factors must be taken into consideration. (1) GE is a large and mature company that has a fairly predictable and reliable revenue stream, and (2) the company is involved heavily in financial services, which means their physical assets alone understate the value of the company. Also, none of the financing receivable were calculated as part of the assets, as we considered them long term. For these reasons, the small ratios are not as big as a concern as they would be for a different company. In comparison to the two competitors we are discussing in this analysis, GE’s ratios are still substantially lower. Phillip’s current ratio is 1.13 and Exelon’s is .94, so GE is still under par. Profitability Ratios These ratios are a measurement that assesses a company’s ability to generate earnings compared to their expenses and other costs during a specific period of time. The three we compared were: (1) Net Profit Margin: This margin is used for an internal comparison within the company. This sometimes has no real affect on the company but can be used to benefit internal affairs. Net Income / Revenue (2) Return on Assets: This indicates the profitability of a company relative to their total assets. Gives an investor an idea of how management is using its assets to 12
  • generate earnings. This is useful to compare both your company and other companies worth. It determines how profitable a company is without the leverage. Net Income / Assets (3) Return on Equity: This measures the rate of return to the shareholders equity of the common stock. This is a basic measure of a company’s profitability which shows how much profit a company can generate with the money shareholders are investing. Net Earnings / Shareholder’s Equity General Electric Ratio Calculations Result Net Profit Margin $ 20,829 / $163,391 12.7% Return on Assets $20,829 / $697,239 3% Return on Equity $20,829 / $112,314 18.5% Competitors Ratio Exelon Co. Philips Electronics Net Profit Margin 15.26% 11.7% Return on Assets 6.31% 8.37% Return on Equity 27.39% 14.81% Like the liquidity ratios above, having a higher percentage as compared to your competitor's percentage indicates that the company is doing well. When comparing GE with Exelon and Phillips, we found GE to be pretty middle of the road. Exelon had higher percentages in all three categories, whereas Phillips came in second in net profit margin, and third in ROA and ROE. All and all, GE seems to be doing well as compared with A good sign for the investor is a high ROE because it shows the profit a company generates with the money shareholders have invested. Exelon obviously takes the cake in this category as their ROE is almost 9% higher than GE and almost 13% above Phillips. Remember, however, that using ROE as a measurement of management performance may not always be the most accurate way to analyze a business. If the company is using 13
  • mostly leverage to boost their ROE, which may be the case for Exelon, it could be involved in may be making some high risk decisions. Activity Ratios Activity Ratios are also known as accounting ratios. The ratios measure the firm’s ability to convert different accounts on their balance sheets into their sales and cash. We compared the following: (1) Inventory Turnover: This is a ratio that shows how many times the company’s inventory is sold then replaced over a certain period of time. Cost of Goods Sold / Ending Inventory (2) Average Collection Period: This is the average days the customer takes to pay their bills. This then indicates the effectiveness of credit and collection policies of the company. It can also determine whether or not the credit terms are realistic. Accounts Receivable / Credit Sales per Day (3) Sales to Fixed Assets: This ratio is the total sales divided by the value of the fixed assets, i.e. property, plant and equipment. Sales / Fixed Assets (4) Total Asset Turnover: This ratio explains the company’s sales generated for every dollars worth of assets. Sales / Assets General Electric Ratio Calculations Result Inventory Turnover $50,588 / $11,401 4.437 Average Collection Period $ 348,159 / $100,700 3.457 Sales to Fixed Assets $163,391 / $74,966 2.180 Total Asset Turnover $163,391 / $697,239 .234 Competitors 14
  • Ratio Exelon Co. Philips Electronics Inventory Turnover 15.32 4.94 Total Asset Turnover .41 .72 For comparison of the activity ratios, it is important again to realize GE is heavily involved in financial services, which makes its results difficult to compare across sectors. For example Exelon’s inventory turnover is almost three times higher at 15.32 as GE’s at 4.437. Though, when compared with Phillips the numbers are essentially the same with Phillips at 4.94 and GE at 4.447. GE’s total asset turnover is lower than that of the other two companies, at .234 to Exelon’s .41 and Phillips .72, but those numbers still seem comparable. At the least they do not set of red flags that one corporation is heads and tails better than the others. Remember that asset turnover is one of the three levers of performance, along with profit margin and financial leverage that combine to form ROE. Low numbers such as the .234 from GE tells the investor, in order for the ROE to be high, either the profit margin or the financial leverage is picking up the slack. Leverage Ratios These ratios are used basically to calculate the financial leverage of the company and gain insight on their methods of financing, or, to measure their ability to meet their financial obligations. We used the following four: (1) Interest Coverage: This is used to determine how easy/tough a company can pay interest on their outstanding debt. (EBIT- interest expense / Interest Expense) 15
  • (2) Cash flow to Long term Dept: This ratio basically appraises the amount of available funds to pay obligations. Cash from Operations / Long term debt (3) Long Term Debt to Equity: This lets you know how much debt they will have even after the certain period of time is up. Long term debt / Shareholders equity (4) Debt to Equity: The measure of a company’s financial leverage. This lets you know what proportion of equity and debt the company is using to finance their assets. Total Liabilities / Shareholders equity General Electric Ratio Calculations Result Interest Coverage $24,620-$19,286 2.28 (times interest earned) $19,286 Cash flow to Long term $30, 646 / $260, 804 .118 Debt Long term debt to equity $260,804 / $112,314 2.322 Debt to equity $577,347 / $112,314 5.14 Competitors Ratio Exelon Co. Philips Electronics Interest Coverage 4.93 (times interest earned) Long term debt to equity 1.13 .06 Debt to equity 1.33 .17 As mentioned above leverage ratios describe how a company establishes its capital through selling shares, taking out a bank loan, possibly reducing dividend payout, etc. Because the three companies in this study have large discrepancies in their debt to equity ratios, different conclusions can be drawn about how they each finance their business operation, 16
  • Phillips Electronics has a very low debt to equity ratio of only .17. This tells the investor that the company is very much dependent on generating funding through equity. When number such as this pop up, it is important to look back at the ROE to make sure that the equity is actually making a return. For Phillips their ROE is 14.81, so although a D/E ratio of .17 seems very low, that equity is generating revenue for the company. Exelon’s D/E is middle of the road at 1.33, meaning that the company has almost equal amount of debt and shareholders equity financing. However, GE’s debt to equity ratio is very high at 5.14. This shows that the company is taking on large amounts of debt to cover their costs. This may be due in part to the financing operations mentioned several times before, but this seems very high compared to Phillips, a representative of the conglomerates industry. Even compared to Exelon, GE’s debt to equity ratio seems out of proportion. Also, the cash flow to long term debt ratio, which appraises the adequacy of available funds to pay obligations, for GE seems low at only .118. Like I mentioned before, this may be an adequate business practice for GE, however, because of the maturity of the corporation and its reliable revenue stream. GE’s creditors probably do not fear that GE will unable to pay off their debt, so they will continue to loan the corporation money. Valuation Ratios These ratios are a measure of how cheap or even expensive a security of a business is, compared to some measure of profit or value. The four ratios below were used to compare the companies in this study: 17
  • (1) Dividend Yield: A return on investment of stock. This ratio shows much a company pays out in dividends each year relative to their price. Dividend per Share / Price per Share (2) Dividend Payout: This is the ratio which shows the percentage of earnings that are paid to shareholders in their dividends. Dividends per Share / Earnings per Share (3) P/E: Measure of price paid for each share relative to their income or profit earned by the firm per share. With a higher P/E ratio, lets you know that investors are paying more for each unit of income Price per Share /Earning per Share (4) Price to Book: This is a ratio used to compare the certain stock’s market value to its book value. Price / (Book Value of Equity / # of Shares Outstanding) General Electric Ratio Calculations Result Dividend Yield $1.03 / $37.21 2.8 Dividend Payout $1.03 / $2.01 51.2 P/E $37.21 / $2.01 18.512 Price to Book $37.2 . 3.43 $112,314 / 10,359.32 Competitors Ratio Exelon Co. Philips Electronics Dividend Yield 2.06 1.93 Dividend Payout 41.76 15.83 P/E 21.00 9.62 Price to Book 5.42 1.45 In the matter of dividends GE does have the most investor friendly practices. Their dividend yield and dividend payout are higher than both of the other companies in 18
  • this study. In fact, compared to Exelon their payout is 10% higher and compared to Phillips it is about 35% higher. GE’s is in the middle as for as P/E with Phillips being lower and Exelon being higher. Investors can use the P/E ratio to compare the value of stocks: if one stock has a P/E twice that of another stock, all things being equal, it is a less attractive investment. These companies are not equal, however, and it is important to remember that they never really are, so looking at P/E alone is not a good measure of a stocks value. A low price to book ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company. As with most ratios, be aware this varies by industry. But again GE’s price to book ratio is comparable with others in the industry and outside of it, so its still a good signal to investors that value cash returns on their investments. Sales Forecast After analyzing the sales data from 2002-2006 our group developed a linear regression where we projected the future sales for General Electric. Projected Sales 200000 Sales ($) Y 100000 Predicted Y 0 2000 2002 2004 2006 2008 Year With this regression analyses we determined that General Electric would have a revenue of $171,987 for 2007 and $183,933.17 for 2008. Which is about a 10% growth in 19
  • revenue and using this we began to construct a pro forma spreadsheet. The pro forma should help management with much of its budgeting and planning and to determine how much money it needs throughout the next year. Pro Forma Financial Statement for General Electric ($ millions) Year 2006 Actual 2007 Net Sales $163,391 Growth rate in net sales 0.1025 Cost of goods sold/net sales 0.3127 Gen., sell., and admin. Expenses/net sales 0.2371 Long-term debt $260,804 $40,290.00 Current portion long-term debt $220,514.00 $220,514.00 Interest rate 0.047 Tax rate 0.1734 Dividend/earnings after tax 0.514 Current assets/net sales 2.62 Net fixed assets $697,239.00 Current liabilities/net sales 2.67 Owners' equity $112,314 Income Statement Year Forecast 2007 Net Sales $180,138.58 Cost of goods sold $56,329.33 Gross profit $123,809.24 Gen., sell., and admin. Exp. $42,710.86 Interest expense $3,146,246.64 Earnings before tax $3,065,148.25 Tax $531,496.71 Earnings after tax $2,533,651.55 Dividends paid $1,302,296.89 Additions to retained earnings $1,231,354.65 Balance Sheet Current assets $471,963.07 Net fixed assets $225,276.00 Total assets $697,239.00 Current liabilities $480,970.00 Long-term debt $40,290.00 Equity $114,560,280.00 Total liabilities and shareholders' equity $115,357,286.00 External Funding Required $66,680,613.87 20
  • So by putting together the pro forma statement we concluded that General Electric will need $66,680,613.87 in external funding at a 10% growth. This should be enough to cover all of its additional expenses throughout the year. Risk Analysis GE is highly sensitive to interest rates and tax policy changes because its liabilities are so high; particularly GE’s long-term debt, because they are a large, mature, slow-growing company. Just think of how much money it takes to finance building a nuclear reactor, and perhaps that will help you put things into perspective. If interest rates increased, this would reduce GE’s ability to finance its debt. If taxes decreased, GE would lose their tax advantage and ROE would decline. Of course, the relationship of these factors are inverse, in that if interest rates decreased, this would increase their ability to finance their company, and if taxes increased, so would their tax advantage, which in turn, increases their ROE. What’s GE’s Sustainable Growth Rate? A little over 9% Sales $163,391,000 Net Income $20,829,000 Dividends $2,878,000 Assets $697,239,000 06 Shareholder Equity $112,314,000 05 Shareholder Equity $109,351,000 Liabilities $577,347,000 Dividends declared per share $1.03 Earnings per share $2.00 Dividend Payout Ratio 51.50% Net Income - Dividends/N.I. 86.18% Profit Margin 12.75% Retention Rate 48.50% 21
  • Asset Turnover 23.43% Asset-to-Equity Ratio 6.38 Sustainable Growth g*=PRAT 9.24% Rate g*=(1-div) Sustainable Growth (asset/equity)*roa 9.55% Rate Return on Assets 2.99% What does that mean??? It means that in order for GE to maximize profits and use its resources efficiently, they need to come as close to that growth rate as possible. In 2006, their growth rate from 2005 was less than 1%. This means that GE had a surplus of cash flow and in order to use it wisely, that cash should be reinvested. It looks like it was too, because according to their financial statements, it looks like they bought treasury stock, which means they’re reinvesting into the company and possibly positioning themselves for a big move in the future. According to our Regression Analysis, we’ve projected that sales will increase by 5.2% in 2007, and 6.9% in 2008. Based on GE’s financial statements, the external funding required for 2006 was $7.5M. What If? 2007 Growth = 1% Sales $165,024,910 Net Income $21,037,290 Assets $704,211,390 Liabilities $584,925,000 07 Shareholder Equity $115,357,286.13 External Funding Req. $3,929,103.87 Estimated Growth 07 5% Sales $171,887,332 Net Income $21,912,108 Assets $733,495,428 Liabilities $584,925,000 07 Shareholder Equity $115,357,286.13 External Funding Req. $33,213,141.87 2007 Growth = 10% Sales $179,730,100 22
  • Net Income $22,911,900 Assets $766,962,900 Liabilities $584,925,000 07 Shareholder Equity $115,357,286.13 External Funding Req. $66,680,613.87 There are three ways that GE can move toward the balanced growth line. 1. Change their Growth Rate 2. Alter their Return on Assets 3. Modify Financial Policies One of the ways to change the growth rate is to increase the retention rate. Currently, their retention rate is a little less than 50%. However, I’m not sure that this is an option for GE because they are a large, mature, slow-growing company, and one of the ways they can attract investors is by paying a dividend. Historically, they have steadily increased their quarterly dividend payout over the last 31 years. In 2006, their quarterly dividend payout was a little more than .25 cents per share. Between the years 2006 – 2007, the market price per share has ranged from the mid to low $30’s and low $40’s. If you’re interested in becoming an investor of GE, now might be a good time to buy, because the stock price has recently fallen. However, this is a company that you would want to invest in for the long haul. I do not expect high growth anytime soon, but rather slow steady growth over possibly decades. The added bonus comes in the form of dividends. With the threat of global warming looming in the not so distant future and increased cost of oil, GE has diversified itself by investing in research for a variety of sources of alternative energy, mainly nuclear. The energy crisis that’s upon us isn’t 23
  • going away anytime soon and GE is in a great position to grow their market share substantially in the coming years. Financial Restructuring We have no recommendations for financial restructuring at this time. Discussion Conclusion GE is a mature company with decent ratios in all categories and to the average investor it may be a good investment. They compete very well with other companies in their industry and offer a good dividend payout ratio to their stockholders. A low risk investor who wants a consistent dividend payout and low volatility, GE is a great company to hold stock in. However, if the investor really is looking to make it big in the nuclear energy sector, a company like Exelon would be a better choice to buy stock in. They are making high returns in ROE and ROA and are leader in the energy industry. Recommendations to Management All four parts of our report, including the financial statement analysis, ratio analysis, risk analysis, and pro-forma sales forecasting, point to the same conclusion. For an investor that is looking for a low risk, long-term investment that has a guaranteed dividend payout GE is a reliable company to invest in. The company has slow and steady growth, with little volatility, which leaves little risk in this investment. However, we know that big risks can lead to big payoffs. So for an investor that is looking for something with a potential for a big return, we would advise them to look elsewhere. 24
  • References: General Electric. Retrieved September 21, 2007. http://www.GE.com. Higgins, Robert C. (2007). Analysis for Financial Management. 25