Group Assignment

Group Assignment - General Electric Annual Report - Group 8

Accounting Group AssignmentGeneral Electric Annual ReportInstructor: Vu Dinh Hien, Ph.D.Students:7 December 2010Table of Contents

21.Introduction

21.1.Purpose

21.2.Company overview

32.Analysis and assessment

32.1.Horizontal analysis

42.2.Vertical analysis

72.3.Benchmark with major competitor

82.4.Ratios analysis

82.4.1.Liquidity ratios

82.4.2.Profitability ratios

102.4.3.Asset utilization ratios

112.4.4.Debt utilization ratios

112.4.5.Stock performance ratios

113.Conclusion

124.Learning points

13References

13Appendix A Siemenss financial statements

13Horizontal analysis

14Vertical analysis

1. Introduction1.1. PurposeBased on financial statements of General Electrics annual report and other relative materials, this report focuses on clarifying the following issues: Horizontal analysis Vertical analysis

Benchmark with major competitors Ratio analysisBy mean of understandings through the above mentioned analysis, interpretation and assessments, our conclusions & learning points are taken out and given in Section 3 & 4 of this report.1.2. Company overviewGeneral Electric Company (GE) was formed by the 1892 merger of Edison General Electric of Schenectady, New York and Thomson-Houston Company of Lynn, Massachusetts, and both plants remain in operation under the GE banner to this day. After 6 years later, in 1896, GE was one of the original 12 companies listed on the newly formed Dow Jones Industrial Average and still remains after 114 years, the only one remaining on the Dow.

The main GEs products are Appliances, Aviation, Consumer electronics, Electrical distribution, Energy Entertainment, Finance, Gas, Healthcare, Lighting, Locomotives, Oil, Software, Water, and Weapons. With over 304,000 employees in 5 subsidiaries: GE Energy, GE Technology infrastructure, GE Capital, NBC Universal, GE Home and Business Solutions, GE has been classified at a group of company with their industry is conglomerate.In 2009, GE was the twelfth-largest company in the world by revenue and the eighth-largest company by market capitalization. The company generated $156 billion US in revenue in 2009, down 14.1% from $183 billion in 2008. GE has been hard hit by the financial crisis and slowdown in global demand, earning $11 billion in 2009, down from $17.4 billion in 2008.

2. Analysis and assessment

2.1. Horizontal analysisGENERAL ELECTRIC

Income statement (Adapted)

Year Ended December 31, 2009 and 2008

20092008Increase (decrease)

(In millions of USD)AmountPercentage

Total revenue156,783 182,515 (25,732)(14.10)%

Costs of goods and services sold:

Cost of goods sold50,580 54,602 (4,022)(7.37)%

Cost of services sold25,341 29,170 (3,829)(13.13)%

Gross Profit80,86298,743 (17,881)(18.11)%

Operating and other expenses:

Investment contracts, insurance losses and insurance annuity benefits 3,017 3,213 (196)(6.10)%

Provision for losses on financing receivables10,928 7,518 3,410 45.36%

Other costs and expenses 37,804 42,021 (4,217)(10.04)%

Total operating and other expenses51,749 52,752 (1,003)(1.90)%

EBIT29,113 45,991 (16,878)(36.70)%

Interest and other financial charges 18,769 26,209 (7,440)(28.39)%

Income (loss) from continuing operations before income taxes10,344 19,782 (9,438)(47.71)%

Benefit (provision) for income taxes1,090 (1,052)

Income (loss) from continuing operations11,434 18,730 (7,296)(38.95)%

Loss from discontinued operations, net of taxes(193)(679)

Net income (loss)11,241 18,051 (6,810)(37.73)%

Less net income attributable to non-controlling interests216 641

Net Income attributable to the Company11,025 17,410 (6,385)(36.67)%

Preferred stock dividends declared(300)(75)

Net Income attributable to GE common shareowners10,725 17,335 (6,610)(38.13)%

In a general picture, GE's business performance in 2009 presented a great decrease compared to prior years 2008 and 2007 (see also figure 1 below for 2007 major numbers) with most of the negative numbers in red. Total revenue decreased 14.10% comparing to year 2008

Gross profit decreased 18.11% comparing to year 2008 And net income decreased 37.73% comparing to year 2008

Figure 1 - Comparison of profitable numbers in different years

One of the reasons might be the economic recession in 2009.2.2. Vertical analysisGENERAL ELECTRIC

Balance Sheet (Adapted)

December 31, 2009 and 2008

(In millions of USD)20092008

AmountPercentageAmountPercentage

Assets

Current assets496,05563.45% 503,32563.09%

Property, plant and equipment69,2128.85% 78,5309.84%

Goodwill65,5748.39% 81,75910.25%

Other intangible assets11,9291.53% 14,9771.88%

All other assets103,41713.23% 106,89913.40%

Assets of business held for sale34,1114.36% 10,5561.32%

Assets of discontinued operations1,5200.19% 1,7230.22%

Total assets781,818100.00% 797,769100.00%

Liabilities

Current liabilities179,47622.96% 218,97627.45%

Bank deposits38,9234.98% 36,8544.62%

Long-term borrowings 338,21543.26% 322,84740.47%

Investment contracts, insurance liabilities and insurance annuity benefits 31,6414.05% 34,0324.27%

All other liabilities 58,8617.53% 64,7968.12%

Deferred income taxes 2,1730.28% 4,5840.57%

Liabilities of businesses held for sale 6,0920.78% 6360.08%

Liabilities of discontinued operations 1,3010.17% 1,4320.18%

Total liabilities 656,68283.99% 684,15785.76%

Stockholder's equity

Total GE shareowners equity 117,291 15.00% 104,665 13.12%

Non-controlling interests 7,845 1.00% 8,947 1.12%

Total equity 125,136 16.01% 113,612 14.24%

Total liabilities and equity 781,818 100.00% 797,769 100.00%

From the balance sheet, we can see the contribution of each amount to the total assets or total liabilities and stockholders equity. Some important amounts are: total current assets, total current liabilities, long term borrowing, etc.

On 2009 percentage of current assets are more than 63% to compare with current liabilities are nearly 23%. It is about 2.5 times, means that the liquidity position of company is good. The same situation is applied for the year 2008. Figure below illustrates this relationship between them.

Figure 2 - Current assets and current liabilities relationship

About the long-term borrowing, it is about 60% of total liabilities. The company seems to invest in expanding its operation for a long-term. But of course taking a big proportion in total liabilities also means GE has to pay much debt in future.

Figure 3 - Total liabilities in relation with current liabilities and current assets

GENERAL ELECTRIC

Income statement (Adapted)

Year Ended December 31, 2009 and 2008

20092008

(In millions of USD)AmountPercentageAmountPercentage

Total revenue156,783 100.00% 182,515 100.00%

Costs of goods and services sold:

Cost of goods sold 50,580 32.26% 54,602 29.92%

Cost of services sold25,341 16.16% 29,170 15.98%

Gross Profit80,862 51.58% 98,743 54.10%

Operating and other expenses:

Investment contracts, insurance losses and insurance annuity benefits 3,017 1.92% 3,213 1.76%

Provision for losses on financing receivables10,928 6.97% 7,518 4.12%

Other costs and expenses 37,804 24.11% 42,021 23.02%

Total operating and other expenses51,749 33.01% 52,752 28.90%

EBIT29,113 18.57% 45,991 25.20%

Interest and other financial charges 18,769 11.97% 26,209 14.36%

Income (loss) from continuing operations before income taxes10,344 6.60% 19,782 10.84%

Benefit (provision) for income taxes1,090 (1,052)

Income (loss) from continuing operations11,434 7.29% 18,730 10.26%

Loss from discontinued operations, net of taxes(193)(679)

Net income (loss)11,241 7.17% 18,051 9.89%

Net Income attributable to GE shareowners10,725 6.84% 17,335 9.50%

Look at the income statement and the chart, percentage of gross profit and net income decreased year to year, due to increase in COGS (and COSS) and operating and other expenses. The company seems not to be a good performance in long-term.

200920082007

Gross Profit51.58% 54.10% 57.61%

Cost of goods and services sold48.42% 45.90% 42.39%

Operating and other expenses33.01% 28.90% 27.87%

Net income7.17% 9.89% 13.41%

Figure 4 - Gross profit and net income in relation with COGS and operating expenses2.3. Benchmark with major competitorIn the section above, it was mentioned that GE did not very good in terms of gross profit due to inefficient operating performance but when compare with its major competitor (Siemens), GEs still better in terms of gross profit: 51,58% compare to 27,02% of Siemens. However, the result of net income is not much different because again GE wasnt efficient in operating. Its operating and other expense is more than double of Siemens in percentage of revenue.

Figure 5 - Benchmark with competitor2.4. Ratios analysisWith the market capitalization of $168.34 billion US compared to the average of conglomerates industry of $6.11 billion US, GE is one of the leading players in the industry ranking at 4th among 173 players. But whether GE really did well in business can be seen by its ratios.2.4.1. Liquidity ratiosRatioIndustry average20092008

Current ratio

= Current assets/current liabilities1.12.76 2.30

Quick ratio

= (Cash + short-term investments + net current receivables) / current liabilities0.80.78 0.51

Current ratio looks good because it's likely double the industry average in years, indicates a very strong financial position and the liquid assets are sufficient to maintain normal business operations. Creditors might have no worries if they lend money to GE.However, quick ratio is not very good because the ratio improved considerably year by year but it's still lower than the industry average. Also, normal acceptable ratio should be 1. However, ratio of 2009 is almost the industry average and it seems that there is no problem with these ratios of the company, especially in considering strong financial position shown by current ratios above.2.4.2. Profitability ratiosRatioIndustry averageGE Rank20092008

Gross margin

= gross profit / revenue47.03% Not in top 10051.58% 54.10%

Operating margin

= operating profit (EBIT) / revenue15.69% 93th18.57% 25.20%

Net margin

= net profit / revenue8.93% 67th7.17% 9.89%

Return on assets (or rate of return on total assets)

= net profit / average total assets4.30% 22nd1.42%

Return on equity

= (net income - preferred dividends) / average stockholder's equity12.97% 41/1739.66%

Earnings per share (EPS)$1.01 $1.72

Although the company was not in top 100 in terms of gross margin and only at 93th for operating margin, both gross margin and operating margin are higher than the industry average. It indicates that the company did better than the average of the industry in terms of profitability and has less financial risk because the company is able to pay for its fixed cost, such as interest on debt.Net margin is only around the industry average. It did better in 2008 but it was less successful than the average in 2009. We may say that economic recession in 2009 affected all the companies, but it seems that it affected GE more.ROA is bad. The company ratio is much lower compared to the industry average. Based on the number calculated, it did not use its assets to earn profit very well in 2009. One of the reasons could be economic recession. Decrease in demands in 2009 could affect bigger companies more because their assets were likely unchanged. However, GE was at 22nd among the players, indicated that many players didn't do well in this hard time.ROE is an interesting figure. The company ratio is lower than but not very far from industry average. The company ranked at 41st among players, indicates that it still did better than many players. But observe that ROA of the company is much lower. Using Du Pont analysis, this difference could result from financing operations with debt, called "trading on the equity" or "leverage" practice. It's proven by the fact that debt ratio of the company is very high (more than double of the industry average, refer to calculation for debt utilization section below) and GE didn't even rank in the top 100.

Figure 6 - Du Pont analysis

In 2009, the company's EPS decreased 41%, indicates that business didn't perform very well in general. Again, 2009 is economic degradation time, so it's understandable. For shareholders, it could be a bad time, but for investors, it could be a good time to buy the stocks and wait for its increase in long-term.2.4.3. Asset utilization ratios

RatioIndustry averageGE Rank20092008

Inventory turnover

= COGS / average inventory4.50 43rd3.94

Inventory days

DII = average inventory / (COGS/day)81.11 43rd92.59

Account receivable turnover

= net sales / average net accounts receivable3.47 8th0.41

Days' sales in receivables

= average net accounts receivable / (revenue/day)105.19 8th884.53

Days sales outstanding

= ending A/R / (revenue/day)837.79 799.97

Days payable outstanding

= ending A/P / (COGS/day)150.42 161.50

Total asset turnover

= revenue / average total assets0.54 8th0.20

The company's inventory turnover ratio is lower than but not very far from industry average. It indicates a little difficulty in selling its inventory. A company's turning of inventory much slower than the industry average might be an indication that there is excessive old inventory on hand which would tie up their cash.The account receivable turnover ratio doesnt look very good. The ratio is very low compared to the industry average but GE ranked at 8th among players. It indicates that the business was not very successful in collecting cash, but it was the common problem among players. Again, 2009 is economic degradation time, so it's understandable. However, because the industry average is much higher than the one of the company, top players of the industry were doing well on this, and it would be a challenge for the company if it wants to be at the leading position among players in a long run.Days sales in receivable ratio looks very bad. As mentioned for account receivable turnover, the problem was common among players. Buy 885 days or almost 3 years is really a long time to collect cash. The industry average is only 105 days or about 3-4 months. The company's cash position might not healthy in a long run if it takes too long to collect cash.Days sales outstanding ratio also looks bad. This calculation is actually similar to days' sales in receivables, but it uses ending A/R instead of average A/R. The calculations show that in 2008, the company had a similar situation even though it was a little bit better.DPO of the company is not really good as it is likely high, the company would have a good cash position, but its vendors would likely be less happy. Comparing with DSO of the company, DPO of the company is much lower, indicates that the company's cash position might not remain healthy in a long run.For total asset turnover, the ratio is low compared to the industry average. Applied Du Pont analysis, net profit margin of the company is around the industry average, but this asset turnover ratio is low, results in low ROA. As mentioned, the company did not use its assets to earn profit very well in 2009. GE was at 8th among the players, indicated that it was the common problem of many players.2.4.4. Debt utilization ratiosRatioIndustry averageGE Rank20092008

Debt ratio

Total liabilities / total assets39.42% Not in top 10083.99% 86%

The company ratio is really high, more than double of the industry average, indicates that the company was in a very bad debt position. As mentioned above, this could be a "leverage" practice to gain high ROE. Leverage is a double-edged sword, increasing profits during good times but compounding losses during bad times.2.4.5. Stock performance ratiosRatioIndustry averageIndustry leaderGE Rank2009

Dividend Yield (annual)2.51% CLX3.50% 2/1733.00%

P/E (TTM)12.9931/17317.99

The dividend yield looks very good. It ranked at the second place, only after industry leader CLX, and this seems to be very good news to shareholders of the company. P/E is higher than the industry average. One of the very reasonable reasons is because high Dividend Yield makes people willing to pay more to buy GEs stocks.3. Conclusion

From analysis and assessment mentioned above, we would like to give here several conclusions for the report as follow: Year 2009 is when economic degradation affected a lot on companies' business including GE. GE's business performance in 2009 presented a great decrease compared to year 2008 in terms of revenue, gross profit and net income. But for investors, it could be a good time to make a long-term investment.

GE stayed strong in financial position as the liquid assets were sufficient to maintain normal business operations. This is a good sign for creditors/bankers. However, debt ratio is high and lenders would have to be careful to evaluate the risk of loaning funds to the business.

In terms of asset utilization and efficiency, it didn't do very well. In a long run, COGS and gross profit of players in the industry will likely be the same, thus GE should pay attention to improve its efficiency and reduce operating costs over long-term or it must make a difference to be competitive. Shareholders of the company might have a reason to be worried about the company future.

GE's business performed likely okay, as ROE of the company is around the industry average. But ROA of the company is really low, that could result from financing operations with debt by "leverage" practice. It's proven by the fact that debt ratio of the company is very high. Leverage practice would be a double-edged sword.4. Learning pointsThere are several major learning points taken out from the analysis & assessment as below: By doing a careful analysis, compare the performance of company with itself and with other competitors, financial numbers can show the connection between activities and performance and reveal a lot. It gives shareholders, investors, creditors ... some indicators to make decisions related to the company's business.

Comparison might be inaccurate sometimes because industry average may not be desirable base to compare to in case only few top players perform excellently while most of the others perform very badly. In those cases, company rank among the players in the industry can be another useful indicator.

However, financial numbers have some limitation because accounting practices differ across firms, some external environment conditions such as economic recession, seasonality, culture difference ... might distort the comparison result. A firms industry category is also difficult to identify sometimes. A conglomerate is an example: percentage of each industry that "conglomerate" firms invest in could be different.References

[1] General Electric Annual Report 2009.

[2] Siemens Annual Report 2009.

[3] Sources of industry average ratios and other related information:

http://moneycentral.msn.com

http://eresearch.fidelity.com

http://finance.yahoo.comhttp://biz.yahoo.com

Appendix A Siemenss financial statementsSiemens is one of the major competitors of GE and was chosen for benchmark in this report. This appendix provides information regarding Horizontal Analysis and Vertical Analysis of Siemenss financial reports in order to have available data for comparison with GE.Horizontal analysis

SIEMENS

Income statement (Adapted)

Fiscal Years Ended September 30, 2009 and 2008

20092008Increase (decrease)

(In millions of Euro)AmountPercentage

Total revenue76,651 77,327 (676)(0.87)%

Cost of goods sold and services rendered55,941 56,284 (343)(0.61)%

Gross Profit20,710 21,043 (333)(1.58)%

Operating expenses:

Research and development expenses3,900 3,784 116 3.07%

Marketing, selling and general administrative expenses10,896 13,586 (2,690)(19.80)%

Other operating expense632 2,228 (1,596)(71.63)%

Total operating expenses15,428 19,598 (4,170)(21.28)%

Other operating income1,065 1,047 18 1.72%

Income (loss) from investments accounted for using the equity method, net(1,946)260 (2,206)(848.46)%

Financial income (expense), net(510)122 (632)(518.03)%

Income (loss) from continuing operations before income taxes3,891 2,874 1,017 35.39%

Income taxes(1,434)(1,015)(419)41.28%

Income (loss) from continuing operations2,457 1,859 598 32.17%

Income (loss) from discontinued operations, net of income taxes40 4,027 (3,987)(99.01)%

Net income (loss)2,497 5,886 (3,389)(57.58)%

Attributable to minority interest205 161

Attributable to shareholders2,292 5,725 (3,433)(59.97)%

Vertical analysisSIEMENS

Income statement (Adapted)

Fiscal Years Ended September 30, 2009 and 2008

20092008

(In millions of Euro)AmountPercentageAmountPercentage

Total revenue76,651 100.00% 77,327 100.00%

Cost of goods sold and services rendered55,941 72.98% 56,284 72.79%

Gross Profit20,710 27.02% 21,043 27.21%

Operating expenses:

Research and development expenses3,900 5.09% 3,784 4.89%

Marketing, selling and general administrative expenses10,896 14.22% 13,586 17.57%

Other operating expense632 0.82% 2,228 2.88%

Total operating expenses15,428 20.13% 19,598 25.34%

Other operating income1,065 1.39% 1,047 1.35%

Income (loss) from investments accounted for using the equity method, net(1,946)(2.54)% 260 0.34%

Financial income (expense), net(510)(0.67)% 122 0.16%

Income (loss) from continuing operations before income taxes3,891 5.08% 2,874 3.72%

Income taxes(1,434)(1.87)% (1,015)(1.31)%

Income (loss) from continuing operations2,457 3.21% 1,859 2.40%

Income (loss) from discontinued operations, net of income taxes40 0.05% 4,027 5.21%

Net income (loss)2,497 3.26% 5,886 7.61%

Attibutable to minority interest205 161

Attibutable to shareholders2,292 2.99% 5,725 7.40%

Thomas Edison & GE ( HYPERLINK "http://www.ge.com/company/history/edison.html" http://www.ge.com/company/history/edison.html), retrieved December 22, 2009.

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