The target company we decided on for our financial analysis is General Electric. At first we were looking at Starbucks, as it is a rapidly growing multinational corporation, but after some research we discovered that the earnings per share growth of Starbucks is 40. 2%. Therefore Starbucks did not meet the requirement set at 50% EPS growth to be considered a truly “rapidly growing company”. We then continued our research and were able to find that General Electric has current EPS growth at 59. 6%, which meets the requirement.
Also, by searching through the annual 10-K we found the following information, which shows that GE is truly a multinational company and has more than 10% sales in other countries. The following information is from page 8 of GE’s 2010 Form 10-K Annual Report filed in SEC EDGAR: Our global growth is subject to economic and political risks. We conduct our operations in virtually every part of the world. In 2010, approximately 53% of our revenue was attributable to activities outside the United States. Our operations are subject to the effects of global competition.
They are also affected by local economic environments, including inflation, recession and currency volatility. Political changes, some of which may be disruptive, can interfere with our supply chain, our customers and all of our activities in a particular location. While some of these risks can be hedged using derivatives or other financial instruments and some are insurable, such attempts to mitigate these risks are costly and not always successful, and our ability to engage in such mitigation has decreased or become even more costly as a result of more volatile market conditions. 2. History of General Electric
In 1876 Thomas Alva Edison invented perhaps the greatest innovation of the age-a successful incandescent electric lamp. The Edison General Electric Company was established in 1890 and combined with the Thomas-Houston Company in 1892, creating the General Electric Company. During this period General Electric’s main offerings included lighting, transportation, industrial products, power transmission, and medical equipment (General History). The first GE appliances were introduced in the late 1890’s with the electric fan and expanded to a full line of heating and cooking devices in 1907. GE Aircraft Engines began in 1917 when the U.
S. government began its search for a company to develop the first airplane engine “booster” for the fledging U. S. aviation industry. GE continued to grow by establishing their first GE plastics department during this time as well. GE’s worldwide activities are astounding. GE is currently entering the market in China through the infrastructure businesses. In Southeast Asia GE is “supplying cutting-edge technology to hospitals in Malaysia; helping to build the infrastructure of Indonesia; providing clean energy and water solutions to the Philippines; building aircraft engines in Vietnam; and much more” (GE World Activities).
In Australia and New Zealand GE employs more than 6,000 employees across four businesses. Building a new Global Research Center in Munich, Germany, and helping build the infrastructure, GE is very involved in Europe. In the Middle East and Africa GE is building infrastructure as well as investing in oil, gas, and aviation. For Latin America, improvements in health care, transportation, infrastructure, clean water, and education are results of GE’s presence. GE is headquartered in North America and seeks to create jobs and opportunities everywhere they serve (GE World Activities).
Overall, GE is in sixty-three countries, working with governments as well as impoverished people to create a better world through innovation and hard work. 3. GE Auditor and Accounting Standards From 2007-2009 GE had KPMG LLP conduct independent audits. KPMG LLP is the U. S. member firm of KPMG International. “KPMG International’s member firms have 137,000 professionals, including more than 7,600 partners, in 144 countries” (KPMG International). This audit, tax and advisory firm said the following in the report of GE’s audit.
In our opinion, the consolidated financial statements appearing on pages 60, 62, 64, 66–114 and the Summary of Operating Segments table on page 34 present fairly, in all material respects, the financial position of GE as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with U. S. generally accepted accounting principles. Also, in our opinion, GE maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established
in Internal Control — Integrated Framework issued by COSO (KPMG). As stated, GE’s annual report is prepared using U. S. GAAP. Being headquartered in the U. S. , this is a practical way to prepare the annual report. There did not appear to be any contradictions in the report from the auditor regarding which accounting standards were used in preparing the annual report. 4. Time Period of Report (Fiscal Year) The Annual Report (10-K) shows that GE’s fiscal year ended December 31, 2010. As for the Auditor Report, the following shows that the reports cover 2008 and 2009 up to December 31.
We have audited the accompanying statement of financial position of General Electric Company and consolidated affiliates (“GE”) as of December 31, 2009 and 2008, and the related statements of earnings, changes in shareowners’ equity and cash flows for each of the years in the three-year period ended December 31, 2009 (KPMG). 5. Reporting Classification Financial reporting practices differ across countries due to variations in legal systems, taxation, providers of financing, inflation, and political and economical ties.
Because GE is headquartered in North America they follow the standards established by the United States. In common law countries, such as the U. S. , accounting standards are much more detailed and developed. GE follows the rules developed by the Financial Accounting Standards Board (FASB) and files in accordance to U. S. GAAP, which specifically details how to apply rules and regulations. Translation The diversity in accounting practice across countries causes translation exposure for every multinational company. When converting financial statements to U. S. GAAP GE follows the current method.
Currency translation adjustments decreased shareowners’ equity by $3. 9 billion in 2010, increased equity by $4. 1 billion in 2009 and decreased equity by $11. 0 billion in 2008 (GE. COM, 2010 Annual Report, PG. 56). Changes in currency translation adjustments reflect the effects of changes in currency exchange rates of subsidiaries that have functional currencies other than the U. S. dollar. At the end of 2010, the U. S. dollar was stronger against most major currencies, including the pound sterling and the euro and weaker against the Australian dollar.
6. Social Reporting In looking at GE’s 2010 Annual Report the only social reporting activity that could be found was their effort to decrease healthcare costs and expand healthcare needs in foreign countries. GE is currently working to provide the types of products that millions in China need. In their Beijing facilities, GE employees are developing and marketing customized products to expand access, lower cost and improve the quality of healthcare in China, especially in rural areas. Similar efforts were underscored in 2010 when the GE Healthcare factory in Wuxi doubled its manufacturing of low-cost ultrasound machines from just four years earlier (GE.
COM 2010 Annual Report, PG. 25). 7. Environmental Reporting General Electric has a long term focus on clean energy. In their 2010 10-K they discussed their goals for unconventional fuel and EV infrastructure. GE also hosted a “Smart Grid Challenge,” where they solicited ideas for clean energy solutions. More than 4,000 ideas were submitted and they funded 20 startup companies and entrepreneurs who will extend GE leadership in energy efficiency. Although the U. S. energy policy remains uncertain, they are continually investing in energy initiatives and development.
The following information is from pages 20 and 21 of GE’s 2010 Form 10-K Annual Report explaining their goals for unconventional fuel and EV infrastructure: As the world seeks energy solutions in the face of environmental, regulatory and financial pressures, unconventional gas sources gain importance. GE provides innovative chemical and equipment technology that treats and supplies millions of gallons of water needed for shale and tight gas production while protecting the environment. GE has created intelligent plug-in electric vehicle charging devices for U. S.
and global markets to help consumers charge their cars during low-demand, lower cost time periods. As a result smart chargers will make plug-on cars more attractive to utilities and consumers, helping to lower our carbon footprint and oil dependence. 8. Activities and Ethics GE is committed to supporting its leadership culture with a strong focus on ethics, work-life balance, integrity, health and safety. “Ecomagination” is the GE business initiative to help meet customers’ demands for more energy-efficient products and to drive reliable growth for GE (GE Citizenship).
“Ecomagination” also reveals GE’s commitment to invest in a future that creates innovative solutions to environmental challenges and delivers valuable products and services to customers while generating profitable growth for the company GE has a dedicated team responsible for both, applying world-class expectations, operational tools and training which range from greenhouse gas emissions and water use to workplace illness and injury. In 2009, GE’s water use was 10. 7 billion gallons, a 30 percent reduction from 2006.
By 2015, GE will improve the energy intensity of its operations by 50 percent, and will reduce its absolute GHG emissions by 25 percent. In 2009, GE’s operational GHG emissions were 5. 79 million metric tons of CO2 equivalents, a reduction of 22 percent from their adjusted 2004 baseline (GE Citizenship). GE’s center around environment, health and safety goes beyond the company’s walls; it works with suppliers to provide a safe and healthy workplace for its employees and reduces the environmental impact on local communities. How GE delivers their results is as important as the results themselves.
GE seeks to lead in workplace and marketplace reliability by respecting the human rights of everyone involved with their business and by enforcing legal and financial conformity. The company has an integrity policy, The Spirit & the Letter, which every employee supports with a signed pledge. They are further enabled by the ombudsperson process, which encourages any employee to report integrity concerns without fear of reprisal. GE also encourages their people to meet their work commitments while balancing their own life responsibilities.
To support this balance, flexible work arrangements are an essential part of the way they conduct business. The company also offers many programs and resources to support employees including financial management, family counseling and more. GE also provides a website to the community called “Healthymagination”. It is about becoming healthier, through the sharing of imaginative ideas and proven solutions. It goes beyond innovations in the fields of technology and medicine, rejoicing the people behind the advancements (GE Citizenship). GE
created “Healthymagination” to gather, share, and discuss healthy ideas and build stronger relationships between patients and doctors. 9. Accounting Obligations & Implications GE prepares their financial statements in conformity with U. S. generally accepted accounting principles; which is rules based accounting standards (GE. com 2010 Annual Report). There has been much debate on whether principle-based accounting would be more efficient than rules-based accounting; particularly in response to accounting scandals, such as Enron and WorldCom.
Rules-based accounting is a list of detailed rules that must be followed when preparing financial statements (Investopedia). This is the preferred choice because the company could be brought to court if their judgments of the financial statements are incorrect; when there are strict rules that need to be followed, the possibility of lawsuits is less likely. Principles-based accounting is used as a conceptual basis for accountants. A simple set of key objectives are set out to ensure good reporting (Investopedia).
The problem with principles-based guidelines is that lack of guidelines can produce unreliable and inconsistent information that makes it difficult to compare one organization to another and it can cause lawsuits. GE uses the more preferred choice of accounting standards and even though it is more detailed I feel it is the best decision, so that they do not end up in the same trouble as Enron and World Com. The company is doing well right now and that could have a large, negative impact on the company. 10.
International Financial Reporting Standards (IFRS) Goodwill Under all accounting standards, the company must recognize goodwill as an asset in its financial statements and present it as a separate line item on the balance sheet. Goodwill serves as the balancing sum that enables one firm to provide accounting information concerning its purchase of another firm for a price significantly different from its book value. Goodwill can be negative, beginning where the net assets at the date of acquisition, fairly valued, go beyond the cost of acquisition.
Negative goodwill is recognized as a gain to the degree that it surpasses allocations to certain assets. Under current accounting standards; GAAP and IFRS, goodwill is no longer recognized as an extraordinary item. Goodwill related to new acquisitions in 2010 was $507 million and included the acquisition of Clarient, Inc. at Technology Infrastructure (GE. COM 2009 Annual Report). Goodwill balances decreased $603 million during 2010, mainly as a result of the deconsolidation of Regency Energy Partners L.
P. at GE Capital and the stronger U. S. dollar (GE. COM 2009 Annual Report). Goodwill related to new acquisitions in 2009 was $3,418 million and included acquisitions of Interbanca S. p. A. and BAC at GE Capital and Airfoils Technologies International—Singapore Pte. Ltd. at Technology Infrastructure (2009 Annual Report). During 2009, the goodwill balance increased by $128 million related to acquisition accounting adjustments for prior-year acquisitions (GE. COM 2009 Annual Report).
The most important adjustment was an increase of $180 million associated with the 2008 acquisition of CitiCapital at GE Capital, which was offset by a decrease of $141 million associated with the 2008 acquisition of Hydril Pressure Control by Energy Infrastructure. Also during 2009, goodwill balances decreased $20,094 million, mainly as a result of NBCU and GE’s Security business being classified as held for sale and by the deconsolidation of Penske Truck Leasing Co. , L. P. at GE Capital and the outlook of 81% of GE Homeland Protection, Inc.
, partly offset by the weaker U. S. dollar (GE. COM 2009 Annual Report). Segmentation The operating businesses that are reported as segments for GE include Commercial Lending and Leasing (CLL), Consumer, Real Estate, Energy Financial Services and GE Capital Aviation Services (GECAS) (Form 10K). The Chairman assigns resources to, and evaluates the performance of these five businesses. Segment profit is determined based on internal performance measures used by the Chairman to assess the performance of each business in a given period.
The Chairman may also exclude matters such as charges for restructuring; rationalization and other similar expenses; in-process research and development and certain other acquisition-related charges and balances; technology and product development costs; certain gains and losses from acquisitions or dispositions; and litigation settlements or other charges, responsibility for which preceded the current management team. Segment profit excludes the effects of principal pension plans, results reported as discontinued operations, earnings attributable to non-controlling interests of consolidated subsidiaries and accounting changes.
GE allocates service costs related to its principal pension plans and GE no longer allocates the retiree costs of its postretirement healthcare benefits to its segments. This method aligns segment operating costs to the active employee costs, which are managed by the segments. Foreign Currency The treatment of translational/functional currency of foreign operations for U. S. GAAP and IFRS is as follows. For U. S. GAAP, local functional currency financial statements are re-measured as if the functional currency was the reporting currency with resulting exchange differences recognized in income (U.S. GAAP vs IFRS).
For IFRS, local functional currency financial statements; current and prior period, are indexed using a general price index, and then translated to the reporting currency at the current rate. The treatment of translation difference in equity, when a partial return of a foreign investment is made to a parent is as follows for GAAP and IFRS. U. S. GAAP, translation difference in equity is recognized in income only upon sale or complete liquidation or abandonment of the foreign subsidiary; no recognition is made when there is a partial return of investment to the parent.
In the case of IFRS, a return of investment is treated as a partial disposal of the foreign investment and a proportionate share of the translation difference is recognized in income (U. S. GAAP vs IFRS). The consolidation of foreign operations is carried out as follows for U. S. GAAP and IFRS. U. S. GAAP the “step-by-step” method whereby each entity is consolidated into its immediate parent until the ultimate parent has consolidated the financial statements of all the entities below it. For IFRS, the method of consolidation is not specified and, as a result, either the”direct” or the “step-by-step” method is used.
GE’s global activities cover all geographic regions and mostly include leasing of aircraft and provision of financial services within these regional economies. Therefore, when countries or regions experience currency and/or economic stress, GE often has increased exposure to certain risks, but also often have new profit opportunities. Potential increased risks include higher receivable delinquencies and bad debts, delays or cancellations of sales and orders principally related to aircraft equipment, higher local currency financing costs and slowdown in our established activities, to name a few (Form 10K).
New profit opportunities include, among other things, more opportunities for lower cost outsourcing, expansion of our activities through purchases of companies or assets at reduced prices and lower U. S. debt financing costs. Financial results of their global activities reported in U. S. dollars are affected by currency exchange. They use a number of techniques to manage the effects of currency exchange; including selective borrowings in local currencies and selective hedging of significant cross-currency transactions.
Such principal currencies are the pound sterling, the euro, the Japanese yen, the Canadian dollar and the Australian dollar (Form 10K). 11. Company Analysis Ratios The following ratios were computed for both 2009 and 2010 in order to determine our assessment for General Electric. Computations were completed for General Electric and the Conglomerate Industry Average and are shown in Table 1. 1. Table 1. 1 Ratio TableGeneral ElectricIndustry AverageCalculation 2010200920102009 Price/Earnings Ratio17. 1614. 9816. 1013. 38[Market value per share]/[Earnings per share(EPS)] Net Profit Margin7. 55%6.
90%7. 00%5. 74%[Net income]/[Sales] Revenue Growth-3. 2651-14. 4847. 90%-16. 15[(Current year revenue – previous year revenue) / Last year revenue] X 100 Debt/Equity Ratio5. 055. 251. 222. 71[Total Debt]/[Total Equity] Price/Earnings This is a valuation ratio of a company’s current share price compared to its per-share earnings. Generally, a higher P/E ratio shows that investors anticipate higher earnings in the future. GE’s P/E ratio is consistently higher than the conglomerates industry average, which shows that overall, investors expect GE to increase earnings more effectively than competitors.
This ratio implies GE is financially healthy and dependable. Net Profit Margin This is a ratio of profitability measuring how much out of every dollar of sales a company actually keeps in earnings. In 2010, for example, each $1 of sales increased net income by $0. 07. GE is consistently higher than the industry average in net profit margin as well as the P/E ratio, which again implies it is ahead of competitors. This ratio speaks to how efficiently GE is run. As the net profit margin is increasing it shows that the costs compared to sales are dropping.
This is a good sign when evaluating a company. Revenue Growth The percent increase or decrease in a company’s revenue between two or more equivalent fiscal periods. GE’s negative revenue growth raises a red flag at first glance. However, when all things are taken into consideration, this concern may be dismissed. Though GE’s revenue has dropped, the net profit margin has increased, showing that they responded to the decrease in sales by cutting costs. Also, within the last year GE has slowed the drop of sales from 17% to 3%.
There is evidence that GE is addressing this issue correctly and gives confidence in the leadership. Debt/Equity Ratio A measure of a company’s financial leverage indicating what proportion of equity and debt the company is using to finance its assets. As GE’s debt/equity ratio is 5. 05, this is slightly concerning. This means that GE is financing most of its activities with debt rather than equity. Debt is a cheaper way to finance up to a certain point. After this point, debt will become the main concern of the company and could cause bankruptcy.
There is no indication that GE is considering bankruptcy or near this point of breaking, yet from 2009-2010 GE did reduce its debt from 5. 25 to 5. 05. This could mean that GE intends to lower the debt/equity ratio and finance operations and expansion through equity more than in the past. This is a ratio which will need to be further investigated and monitored. Stock Prices In order to determine the valuation of stock prices for GE we have used the following formulas from www. moneychimp. com. YearEarnings 1E(1 + G) 2E(1 + G)2 NE(1 + G)N
N + 1E(1 + G)N N + 2E(1 + G)N E=This year’s Earning per Share G= Growth rate of earnings N=Number of years earnings will growAccording to Yahoo Finance GE Earnings per Share for 2010 was 1. 06 and for 2009 was . 26. GE experienced a 59% growth from 2009 to 2010 which would explain the difference in EPS. By computing the formulas we have determined that stock price has varied between $13. 75 and $21. 65 in the past. We believe that this amount is undervalued. GE’s 10K has shown that the intrinsic value between $27. 42 and $36. 35.
Our opinion is based on the trends we have seen of growth and acquisition. We also believe that GE’s share is currently undervalued due to past unstable economic conditions. 2009 and 2010 were a period of regrowth according to GE and they prospect that 2011 will be a year of stabalization. According to CEO Jeffrey Immelt, “The world we face in 2011 is getting better. We see signs of economic strength every day. It doesn’t always “feel great,” because we have entered a new economic era. Growth around the world is happening at multiple speeds.
Developing markets like Brazil and India are experiencing fast growth, while much of the developed world is dealing with sluggish growth and fiscalconstraints. ” GE has shown tremendous growth from 2009 to 2010 and we prospect that their growth will continue to flourish in the 2011 fiscal year. As emerging markets continue to grow and expand GE will experience growth opportunities and economic gains. We believe that signs of global economic stability are showing and GE will only profit from this outcome.