Embed Size (px)
Citation preview
Author’s Name 1
Running Head: Economic Analysis
Author’s Name 2
Table of Content
Introduction 03
General Electric: An Outlook 03
SECTION-1 04
SECTION-2 06
SECTION-3 11
REFERENCES 12
APPENDIX 13
Author’s Name 3
Introduction
Doing Financial and economic analysis of an organization is indeed a tough ask because of the
variation among the financial figures of the financial statements. Financial Statements are the
end products of an organization which represents the actual financial position of an organization,
economically and strategically.
This assignment is all about analyzing an organization economically through different ratios like
profitability, liquidity, credibility and solvency. The company which has been chosen for this
analysis is General Electric. The first part of this assignment will detail down about the corporate
background of the company.
Executive Summary
The company which has been chosen for this analysis is General Electric. In 1896, General
Electric was one of the unusual 12 companies expected the newly-created Dow Jones Industrial
Average and still rest after 113 days, the only one lingering on the Dow (however it has not
continually been in the DOW guide). The company is indeed in a good financial health which
can be gauge from the ratio analysis. The company has been counted as one of the fastest
growing companies of the world which has a revenue portfolio of billions of dollars. The
company performed extremely well even at the time of economic downturn and according to the
computed result it can be said that the growth momentum of the company will remain the same
in future as well.
General Electric: An Outlook
The General Electric Company, or GE (NYSE: GE), is an American multinational conglomerate
corporation incorporated in the State of New York. In 2009, Forbes ranked GE as the world's
main party. The crowd has 323,000 employees around the world.
Author’s Name 4
GE was named to the Dow Jones Sustainability World Index as one of the world's leaders in
environmental, communal and monetary programs. The net income of the company was US$
10.7 billion FY 2009. The company has about 328,000 employees across the globe.
The report has been divided into 3 different sections. The first section is about horizontal and
vertical analysis of the company followed by ratio analysis in the 2nd section while the 3rd section
of the report analyzes the creditworthiness of the company.
SECTION-1
HORIZONTAL AND VERTICAL ANALYSIS
Horizontal and vertical analyses are two different kinds of analysis. Horizontal analysis deals
with the matching of financial performance in different years while vertical analysis match each
item a specific item in the balance sheet or income statement. The data of three years, 2008, 2009
and 2010 have been taken to analyze.
Refer to the first appendix, it can be said that the overall financial situation of the company is
good. Let’s first analyze the income statement horizontally. In the year 2008 the revenue of the
company was US$ 150,211 million which increased by 3.37% and 16.93% in the fiscal year
2009 and 2010 respectively showing that the company is doing well as far as generating revenue
is concerned. With contrast to total revenue, the cost of revenue of the company increased with a
higher percentage like 7.45% and 16.23% in the year 2009 and 2010 respectively which shows
that the company is not able to control its cost as compared to its revenue. The year 2009 was the
toughest year for the company due to the arrival of the current economic downturn which
resultantly decreased the operating income by 29.65% in the year 2009 as compared to the same
Author’s Name 5
period of last year. In the year 2010, the operating income of the company increased by 97.79%
which was an excellent backup from a drastic decrease a year ago. Net Income of the company
decreased and increased by 5.3% and 57.91% in the year 2009 and 2010 respectively. Let’s now
move towards the vertical analysis of income statement.
In vertical analysis, sales or revenue become the specific factor to assess the performance of the
company as compared to this specific component. Gross profit of the company is 40.85% of the
total revenue in the year 2008 and the same went to 38.66% and 38.80% in the years 2009 and
2010 respectively. The operating income of the company was 9.45% in the year 2008 as
compared to net revenues of the company which decreased and then increased by 6.43% and
10.88% in the year 2009 and 2010 respectively. The net income of the company decreased by
5.3% in the year 2009 but increased heavily by 57.91% in the year 2010. Vertical Analysis
reveals that the net income of the company was 7.75% against the total revenue of the company
in the year 2008. The Net income of the company against the total revenue was 7.100% and
9.58% in the year 2009 and 2010 respectively.
Balance Sheet horizontal and vertical analysis of GE is mentioned in the appendix. Assets of the
company decreased by 10.72% in the year 2009 and again increased by 31.63% in the year 2010.
Total Assets of the company increased by 4.08% and 2.09% in the year 2009 and 2010
respectively. Liability and shareholder’s equity of the company increased by 12.19% and 25.03%
in the year 2009 and 2010 respectively. Short term assets of the company are 10.51% in the year
2008 and 9.01% and 6.04% respectively against total assets of the company.
Author’s Name 6
SECTION-2
RATIO ANALYSIS
Net Profit Margin (NPM)
Net Profit Margin (NPM) is one of the widely used profitability ratios in the literature of finance.
Net profit margin evaluates the net profit earned by the company. High NPM is a clear indication
of high profitable company. The computed figures along with the graph of NPM are mentioned
below,
General ElectricYears Sales Net Income NPM
in million $ in million $
2008 371 43 11.642009 349 37 10.602010 350 85 24.29
Mean NPM 15.511
The NPM of General Electric decreased by 104 basis points for year (2009) because the Net
Profit of the company decreased by 14.35%. Management of the company argued that it was
current economic crisis that became the major cause of that downturn. The mean NPM of the
company is 15.51% which is clearly showing that the company is able to generate approx 16$
from the net sales of 100$.
Operating Profit Margin
Likewise, NPM, Operating Profit Margin (OPM) is another widely used financial tools to assess
the financial health of an organization. The computed figures are mentioned below,
Author’s Name 7
General ElectricYears Sales Operating Income OPM
in million $ in million $
2008 371 54 14.612009 349 46 13.072010 350 81 23.03
Mean OPM 16.901
There is a marginal difference between NPM and OPM. From the above mentioned chart, it is
found that General Electric is performing better than its major competitor as far as generating
operating income is concerned. The average OPM of General Electric (GE) is 16.9% which
shows that the company is able to generate OPM of 16$ from 100$ of sales.
Operating Cash Flow to Sales
Net income of a company does not mean that the company is in positive node because some
sales can be on credit basis.
General ElectricYears Sales Cash Flow C/S
in million $ in million $
2008 371 126 33.962009 349 106 30.302010 350 111 31.63
Mean OPM 31.965
Author’s Name 8
The cash to sales of the company was 33.96% in the year 2008 which decreased by 3.3% in the
year 2009 and then increased by 31.63% which shows that the cash to sales performance of the
company is good.
Efficiency Ratios
There are two ratios which come under the ambit of efficiency ratio which are return on assets
(ROA) and Return of Equity.
Return on Asset (ROA)
A ratio that evaluates, how much the company’s assets are fruitful in generating net income is
known as Return on Assets (ROA). A high ROA manifesting that the assets of the company are
doing a good job in contributing the company in its long run.
General ElectricYears Total Assets Net Income ROA
in million $ in million $
2008 789 43 5.452009 769 37 4.812010 817 85 10.40
Mean ROA 6.888
Return on Asset (ROA) is another important ratio comes under the ambit of finance. The ROA of
GE increased in the year 2011 by 6.24% that increases the net income of the company by
129.73% in the year 2011 as compared to the same period of last year. The average ROA of GE
is 6.88% which shows that the company is able to generate approx 7$ from the 100$ of assets.
Author’s Name 9
Return on Equity
A ratio to analyze what a company earned on its equity is known as Return on Equity (ROE) and
it is also an important ratio in the finance literature.
Evaluation
General ElectricYears Total Equity Net Income ROE
in million $ in million $
2008 584 43 7.362009 564 37 6.562010 613 85 13.87
Mean ROE 9.263
Computed ROE of both the companies are showing that the companies are in a good position in
terms of gain return from its equity. The ROE of GE decreased by 63 basis points in the year
2010 because the net income of the company decreased by 3.42% in the same fiscal period. In
the year 2011, the ROA of GE increased by 5.59% showing a better performance as compared to
a year before.
Liquidity Ratios
A thing which can be change into case instantly it’s called liquidity.
Current Ratio
Author’s Name 10
Current ratio is a ration that identifies the strength of an organization in meeting its short term
financial obligations
Evaluation
The computed CR of both the companies are mentioned below,
GECurrent Assets Current Liabilities CR
In million $ in million $ 594.00 476.00 1.248 458.00 254.00 1.803 100 110 0.909 1.320
The CR of the company is above the psychological level of 1 throughout the analytical period.
Average CR of the company was 1:3 which is a clear indication that the company is able to
fulfill its short term obligations and it is in a good financial condition.
Acid Test Ratio
It is a ratio somewhat identical to current ratio which tests the stance of meeting the short term
obligations after subtracting out the inventories of the company
Author’s Name 11
GECurrent Assets Current Liabilities ATR
In million $ in million $ 591.10 476.00 1.242 455.20 254.00 1.792 97 110 0.879 1.304
The computed CR and computed ATR are somewhat similar and can be said that the company is
doing good in this threshold.
SECTION-3
According to the Altman Z Score, the company is in good financial position and in good credit
worthiness. The company has enough capital to invest in the expansion of the company is
possible. The computed Altman Z Score is around ‘3.2’ which is above the psychological level.
According to standard Altman Z Score, a company that scores 3 or above is in the safe heaven
and has no chance of any bankruptcy. Considering the same, it can be said that there is no chance
of bankruptcy found in GE operation. All of the above mentioned ratios are enough to tell the
financial health of the company.
Author’s Name 12
References
Daniel, G & Johnson, H (2006), Tactics in Financial Management, McGraw Hill Publications
Mark, C & Zwieg, K (1991), Financial Management, McGraw Hill Publications
Rameez, K (2008), Introduction to Financial Management, McGraw Hill Publications
Author’s Name 13
Appendix
Horizontal/Vertical Analysis of Income Statement 2008 2009 2010
Total Revenue 150,211.00 155,278.00 181,581.00Horizontal 3.373254955 16.93929597
Cost of Revenue, Total 87,696.00 94,230.00 109,530.00Horizontal 7.450738916 16.23686724
Gross Profit 61,364.00 60,042.00 70,465.00Horizontal -2.154357604 17.35951501
Vertical 40.85186837 38.6674223 38.80637291Selling/General/Administrative
Expenses, Total10,203.00 13,644.00 10,446.00
Research & Development 0 0 0Depreciation/Amortization 0 0 0
Interest Expense (Income), Net Operating
0 0 0
Unusual Expense (Income) 0 0 0Other Operating Expenses,
Total38,104.00 37,409.00 41,835.00
Operating Income 14,208.00 9,995.00 19,770.00Horizontal -29.65230856 97.79889945
Vertical 9.458694769 6.436842309 10.88770301Interest Income (Expense), Net
Non-Operating0 0 0
Gain (Loss) on Sale of Assets 0 0 0Other, Net 0 0 0
Income Before Tax 14,208.00 9,995.00 19,770.00Horizontal -29.65230856 97.79889945
Vertical 9.458694769 6.436842309 10.88770301Income Tax - Total 1,050.00 -1,148.00 1,102.00
Income After Tax 13,158.00 11,143.00 18,668.00Horizontal -15.31387749 67.5311855
Minority Interest -535 -200 -641
Equity In Affiliates 0 0 0U.S. GAAP Adjustment 0 0 0
Net Income Before Extra. Items
12,623.00 10,943.00 18,027.00
Total Extraordinary Items -979 82 -617
Net Income 11,644.00 11,025.00 17,410.00
Horizontal -5.316042597 57.9138322 7.751762521 7.10016873 9.588007556
Author’s Name 14
Horizontal/Vertical Analysis of Balance Sheet of GE
2008 2009 2010Assets
Cash and Short Term Investments
78,958.00 70,488.00 48,187.00
Horizontal -10.72722207 -31.63800931Vertical 10.510692 9.014952021 6.040219663
Total Receivables, Net337,627.00 349,761.00 400,018.00
Total Inventory 11,526.00 11,987.00 13,674.00
Prepaid Expenses 0 0 0Other Current Assets, Total 0 0 0Property/Plant/Equipment, Total - Net
66,214.00 68,970.00 78,530.00
Goodwill, Net 64,473.00 65,076.00 81,759.00Intangibles, Net 9,973.00 11,751.00 14,977.00Long Term Investments 71,692.00 78,427.00 62,925.00Note Receivable - Long Term 0 0 0Other Long Term Assets, Total
42,165.00 49,239.00 12,279.00
Other Assets, Total 68,588.00 76,202.00 85,420.00Total Assets 751,216.00 781,901.00 797,769.00
Horizontal 4.084710656 2.029412931 Liabilities and Shareholders' Equity
Accounts Payable 14,657.00 19,527.00 20,819.00Payable/Accrued 0 0 0Accrued Expenses 0 0 0Notes Payable/Short Term Debt
117,959.00 129,869.00 164,061.00
Current Port. of LT Debt/Capital Leases
0 0 0
Other Current Liabilities, Total
1,563.00 1,141.00 3,340.00
Total Current Liabilities 134,179.00 150,537.00 188,220.00Horizontal 12.19 25.03Vertical 17.86157377 19.25269312 23.5932958
Total Long Term Debt360,681.00 373,574.00 359,701.00
Deferred Income Tax 2,840.00 2,081.00 4,584.00
Minority Interest 5,262.00 7,845.00 8,947.00Other Liabilities, Total 129,318.00 130,573.00 131,652.00Total Liabilities 632,280.00 664,610.00 693,104.00 5.11 4.29
Author’s Name 15
84.16753637 84.99925182 86.8802874Redeemable Preferred Stock 0 0 0
Preferred Stock - Non Redeemable, Net
0 0 0
Common Stock 702 702 702Retained Earnings (Accumulated Deficit)
131,137.00 126,363.00 122,123.00
Treasury Stock - Common -31,938.00 -32,238.00 -36,697.00Unrealized Gain (Loss) -636 -435 -3,094.00Other Equity, Total 19,671.00 22,899.00 21,631.00Total Equity 118,936.00 117,291.00 104,665.00Horizontal -1.38 -10.76Vertical 15.83246363 15.00074818 13.1197126
Total Liabilities & Shareholders’ Equity
751,216.00 781,901.00 797,769.00
4.08 2.03
