Financial recommendation, Strengths & Weaknesses of General Electric
An analysis of a financial statement is a report that is prepared by a company and issued to investors and creditors. It helps give a clear picture of the company’s performance and its health in terms of its financial stand. An investor can therefore evaluate the present and past performance of the organization and see the direction in which the company is moving before making a decision.
An investor understands financial statements by looking at the company’s assets, debts, cash statements and investments. They then use common size analysis, ratios and comparative analysis to evaluate the annual reports and make an informed decision on the health of the company.
General Electric Company (GE) operates as a technology, media and financial services company worldwide. It was founded in 1892 and is based in Fairfield, Connecticut. (GE., 2017). The company is at the center of the Energy Industry with infrastructure ranging from gas, steam all the way to renewable energy solutions. Some of its major products include oil and gas and reliable power, air cooled heat exchangers among others services such as management of energy and assisting clients in production of efficient energy. The closest competitors of General electric(NYSE:GE) include Dupont Honeywell (NYSE: HON), Danaher corporation (NYSE: DHR), Citigroup Inc Philips and Siemens AG (NYSE: SI). The company however has a very big economic moat due to its market capitalization of around $222 billion.
Financial information gathered over a period of time can be analyzed horizontally using ratios. This type of analysis is also known as comparative analysis or trend analysis. The analysis gives the time perspective of the financial statements with the intention of finding out whether any numbers are unusually low or high.
This is usually in a two-year format. A different format can contain more years but lacks variance. This format only shows the overall fluctuations over the number of years and can therefore be used to predict the future position of the company. In General Electric, the revenues were experiencing a downtrend but this changed during 2015-16 period whereby it increased by 0.05%. The operating income stopped experiencing an increase of 42.7% and 41.9% in the 2014-15 and 2015-16 period and started decreasing by 14.1%. From the income statement, we can also see that the total costs had been decreasing for the past 3 years but in the 2015-16 period, increased exponentially by 2.3%.
An analysis on the balance sheet shows how operations impact the assets and liabilities. It is therefore the statement of financial position during a single moment in time. That is why it is less considered when it comes to assessment of a company’s health. The balance sheet equation whereby the assets are equal to liabilities plus the equity is applied is applied. From the balance sheet, we can see that the proportion of total assets decreased over the last three years. In the 2015-16 period, total liabilities declined by 7.2% while the other years experienced a marginal decrease. There is a very gradual increase of 8.8% in the final period which is a good sign. It is therefore used to show the investors what the company owns, owes to debtors and how the odds are before making a financial decision.
The liquidity ratio can be used to evaluate the cash or current asset stand of the organization. It focuses on the short-term liabilities and short-term assets hence giving a connection between a company’s cash and its current assets to the liabilities that are currently in the company. In General electric, the Current ratio is above the normal 2:1 ratio hence can be deemed satisfactory. This shows that the company can pay its short-term liabilities using the current assets. When we look at the quick ratio, it is very attractive to investors as it is more than double the normal one of 1:1. These are some of the factors that are erroneously affecting the results whereby General Electric is avoiding having a situation of a high balance of inventory in the current assets being maintained. In addition to this, the cash ration in GE has increased significantly in the past three years.
The liquidity issues affecting competitive companies within the industry show that investors generally prefer investing in companies with lower debts. Companies like Citigroup are not in a healthy financial position when compared to GE. Siemens is above ground but does not face any impeding dangers. The increase in debt ratio means higher debt and this can eventually translate to liquidity in the worst-case scenarios. (Bradford et al., 2012)
Ratio analysis is therefore a significant instrument in financial analysis. Other ratios include the profitability, solvency and the market ratios of the company. The solvency ratio is the greatest determiner of liquidity and it is greatly affected by the profitability and solvency ratios.
General Electric being a joint venture with Shenhua International Limited, is smack in the middle of one of the most important industries in the market. Some of its competitors I will analyze as stated earlier include but not limited to Siemens (SI), Philips(PHG) and Citigroup(C).
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In terms of market capitalization, GE has established a complacent moat, the number of workers is also higher compared to its competitors. The areas where GE is not leading are not badly off since it is posing a good challenge. It is due to these factors that the company can boastfully claim to be a venue for investors to grow their fortunes. This has been attributed to good branding, affordable services and other features that make it stand out from the rest.
Financial recommendation, Strengths & Weaknesses of General Electric
Despite all the red indicators, the positive in the company have shown consistent profits. This can be translated into a greater purchasing power in future. These profits have been made in both good and bad times. It shows that the management of the company is in good hands as they can cut on expenditure when necessary. $10 for every $100 for the past several years is recommendable despite there being room for improvement.
When I take a closer look at the financial health of GE, it is evident that the company is using borrowed capital so as to grow its investments. As much as GE is a capital-intensive company, it has not been bringing in enough returns so as to pay off its debt at a good rate. From the sheets, there is an average return of $5.3 for each $100 that is invested. For the past five years, ROI has been on a downward trend. This is a very risky signal that investors always look at considering the fact that GE seems to generate $13 for every $100 that shareholders invest. The major reasons that are causing this include buying of new equipment to ward off competition using borrowed money and spending almost 82% of the profits made to run the company.
It is evident that the GE capital mistake is really bad but the company has pawns inform of businesses from all areas. With competition from Tesla coming around the corner, these pawns might not be all they need to get back in the game when hell breaks loose. They will need to avoid making questionable acquisitions and focus on growing the return on investments. All in all, it is a great investment opportunity an excellent stock worth having in one’s portfolio. This is due to a constant dividend stock and the great value to be created in the company.
1. Stephen A., Randolph W. & Bradford D. (2012), Fundamentals of Corporate Finance: McGraw-Hill Education, Standard Edition, Tenth Edition
2. Richard A., Stewart C. & Alan J. (2014) Fundamentals of Corporate Finance. McGraw-Hill Education
3. GE. (2017). General Electric Company Stock Retrieved on 18th August 2017 from: http://www.vuru.co/analysis/GE
- Quote paper
- James Njiru (Author), 2017, Financial Statement Analysis of General Electric, Munich, GRIN Verlag, https://www.grin.com/document/377234