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Analyzing General Electric’s Operating Efficiency $GE

Picture Sourced by www.greendiary.comFor investors looking for a large-cap company that is stream-lining their businesses, General Electric (NYSE:GE) is a dividend paying company that is focusing on margin expansion. Using the analysis below will indicate if General Electric’s management is achieving this goal.

Profitability

Profitability is a class of financial metrics used to assess a business’s ability to generate earnings compared with expenses and other relevant costs incurred during a specific period of time. In this section, we will look at four tests of profitability. They are: net income, operating cash flow, return on assets and quality of earnings. From these four metrics, we will establish if the company is making money and gauge the quality of the reported profits.

  • Net income 2010 = $11.644 billion
  • Net income 2011 = $14.151 billion
  • Net income 2012 = $13.641 billion
  • Net income 2013 TTM = $13.862 billion

The slow recovery in the economy is displayed in the company’s increase in revenue over the past four years. In that time period, GE’s net profits have increased from $11.644 billion in 2010, to $13.862 billion in 2013 TTM, which represents a 19.05% increase.

  • Operating income 2010 = $14.208 billion
  • Operating income 2011 = $72.027 billion
  • Operating income 2012 = $66.301 billion
  • Operating income 2013 TTM = $63.798 billion

Operating income is the cash generated from the operations of a company, generally defined as revenue less all operating expenses, but calculated through a series of adjustments to net income.

Over the past three years, GE’s operating income has increased from $14.208 billion to $63.798 billion in 2013 TTM.

ROE – Return on Equity

As shareholders’ equity is measured as a firm’s total assets minus its total liabilities, ROE reveals the amount of net income returned as a percentage of shareholders’ equity. The return on equity measures a company’s profitability by revealing how much profit it generates with the amount shareholders have invested.

Net Income / Shareholders’ Equity

  • 2010 – $11.644 billion / $118.936 billion = 9.79%
  • 2011 – $14.151 billion / $116.438 billion = 12.15%
  • 2012 – $13.641 billion / $123.026 billion = 11.09%
  • 2013 TTM – $13.862 billion / $122.692 billion = 11.30%

Over the past three and a half years the ROE is showing improvement. Since 2010 the ROE has increased from 9.79% to 11.30%. As the ROE has increased over the past four years, this reveals that there has been an increase in how much profit has been generated compared to the amount that shareholders have invested, thus indicating an increase in shareholder value.

Debt And Capital

The Debt and Capital section establishes if the company is sinking into debt or digging its way out. It will also determine if the company is growing organically or raising cash by selling off stock.

Total Liabilities To Total Assets, Or TL/A ratio

TL/A ratio is a metric used to measure a company’s financial risk by determining how much of the company’s assets have been financed by debt.

  • Total assets
    • Total assets 2010 = $751.216 billion
    • Total assets 2011 = $717.242 billion.
    • Total assets 2012 = $685.328 billion.
    • Total assets 2013 TTM = $660.541 billion.
    • Equals an decrease of $90.675 billion
  • Total liabilities
    • Total liabilities 2010 = $632.280 billion
    • Total liabilities 2011 = $600.804 billion
    • Total liabilities 2012 = $562.302 billion
    • Total liabilities 2013 TTM = $538.032 billion
    • Equals an decrease of $94.248 billion

Over the past three and a half years, GE’s total assets have decreased by $90.675 billion, while the total liabilities have decreased by $94.248 billion.

Working Capital

Working Capital is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firm’s financial stability. It is also an index of technical solvency and an index of the strength of working capital.

Current Ratio = Current assets / Current liabilities

  • Current assets
    • Current assets 2010 = $472.049 billion
    • Current assets 2011 = $453.137 billion
    • Current assets 2012 = $428.729 billion
    • Current assets 2013 TTM = $425.725 billion
  • Current liabilities
    • Current liabilities 2010 = $156.717 billion
    • Current liabilities 2011 = $166.210 billion
    • Current liabilities 2012 = $221.403 billion
    • Current liabilities 2013 TTM = $201.035 billion
  • Current ratio 2010 = 3.01
  • Current ratio 2011 = 2.73
  • Current ratio 2012 = 1.93
  • Current ratio 2013 TTM = 2.12

Over the past three and a half years, GE’s current ratio has decreased. As the current ratio is currently well above 1, this indicates that General Electric would be able to pay off its obligations if they came due at this point.

Common Shares Outstanding

  • 2010 shares outstanding = 10.678 billion.
  • 2011 shares outstanding = 10.620 billion.
  • 2012 shares outstanding = 10.564 billion
  • 2013 TTM shares outstanding = 10.120 billion

Over the past three and a half years, the number of company shares has decreased. The company has decreased the shares from 10.678 billion to 10.120 billion.

Operating Efficiency

Operating Efficiency is a market condition that exists when participants can execute transactions and receive services at a price that equates fairly to the actual costs required to provide them. An operationally efficient market allows investors to make transactions that move the market further toward the overall goal of prudent capital allocation without being chiseled down by excessive frictional costs, which would reduce the risk/reward profile of the transaction.

Gross Margin: Gross Income/Sales

The Gross Profit Margin is a measurement of a company’s manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.).

  • Gross margin 2010 = $78.498 billion / $150.211 billion = 52.26%.
  • Gross margin 2011 = $79.022 billion / $147.300 billion = 53.65%.
  • Gross margin 2012 = $73.049 billion / $147.359 billion = 49.57%.
  • Gross margin 2013 TTM = $71.492 billion / $145.486 billion = 49.14%.

Over the past four years, GE’s gross margin has declined. The ratio has decreased from 52.26% in 2010 to 49.14% in 2013 TTM.

Asset Turnover

The formula for the asset turnover ratio evaluates how well a company is utilizing its assets to produce revenue. The numerator of the asset turnover ratio formula shows revenue found on a company’s income statement and the denominator shows total assets, which are found on a company’s balance sheet. Total assets should be averaged over the period of time that is being evaluated.

  • Revenue growth
    • Revenue 2010 = $150.211 billion
    • Revenue 2011 = $147.300 billion
    • Revenue 2012 = $147.359 billion
    • Revenue 2013 TTM = $145.486 billion
    • Equals an decrease of 3.15%.
  • Total Asset growth
    • Total assets 2010 = $751.216 billion
    • Total assets 2011 = $717.242 billion.
    • Total assets 2012 = $685.328 billion.
    • Total assets 2013 TTM = $660.541 billion.
    • Equals an increase of 12.07%.

Over the past three and a half years the revenue growth has decreased by 3.15% while the assets have decreased by 12.07%. As GE is streamlining thier company this is an indication that the company from a percentage point of view has been more efficient at generating revenue.

Based on the information above we can see that GE has produced mainly good results from a fundamental point of view. Revenue over the past three and a half years, has decreased by 3.15% but the assets have decreased by 12.07% this indicates an increase in efficiency. The ROE has increased from 9.79% to 11.30% in the same time period also indicating efficiency. GE has also reduced their shares outstanding significantly over the past three and a half years, thus creating shareholder value. A notable blemish is that the gross margin has declined over the past few years. As the company is streamlining their businesses I would like to see this metric improve.

Spin-off

As GE is streamlining their overall business, the spin-off of the $53 billion consumer finance unit will increase the company’s profitability as GE will rely less on revenue from its financial businesses.

Based on the analysis above General Electric is increasing their efficiency.

Picture sourced by www.greendairy.com

 

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