Analysis of GE's Financial Statements: Is GE Viable Investment? - Essay Sample

Introduction

The report is a financial statements analysis of General Electric, aiming at assessing whether the company is a viable investment opportunity. The study shows that GE reported a net loss in the last three years. Also, the ratio analysis demonstrates that the management was ineffective in earning income for the company. The trend analysis shows the unstable performance of the company. Further, the GE solvency level is weak due to a significantly high gearing ratio. However, in the short-run, GE is liquid, given the higher amount of current assets than short-term liabilities. The efficiency ratios demonstrate the management did not maximize its revenue relative to its total assets. Overall, GE's past performance, especially profitability, efficiency, and solvency, is not promising, making the project not attractive to investors who expect to maximize their returns in terms of dividends and capital growth.

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Discussion and Analysis

Income Statement

The income statement shows the total net revenue, operating expenses, and net profit or net loss. The revenue segment shows the sources of income from the sales of products or services. In the income statement of General Electric (GE), the revenue section of the income statement illustrates three sources of sales revenue, namely, revenue from the sale of goods, sale of services, and capital revenue from services. The other essential item of the statement of earnings is the expenses. Expenses represent costs incurred by an entity during the normal operations. Operating expenses reduce the aggregate revenue. Thus, the management needs to manage the costs effectively to improve profitability. The final crucial element of an income statement is the profit or loss. The net income or loss is the difference between the total revenue and the aggregate operating costs. When the revenue is more than the expenses, the firm reports a net income, and when it is lower, it's a loss.

Trend Analysis

The income statement shows the firm's performance over some time and facilitates comparison from one period to another. Mainly, the profitability of a firm is the measure of the performance. The trend analysis shows that GE's total revenue decreased in 2018 from $99279 million in 2017 to $97012 million (Annual Report, 2019). The total sales continued to lower in 2019 to a tune of $95214 million (Annual Report, 2019). It represents a 2.28% and 1.85% reduction in sales in 2018 and 2019. respectively. The management attributes the decline of the aggregate revenue in 2018 to the decrease in the industrial segment revenue and the impact of the foreign currency (Annual Report, 2019). In 2019, the management showcased that the revenue decrease came from the lowered corporate revenue resulting from the sale of the existing business section and the impact of the foreign currency exchange (Annual Report, 2019).

The operating expenses increased in 2018 from $112707 million in 2017 to $120320 million, translating to a 6.75% increase. In 2019, GE reported a 19.97% decline in the total operating expenses to $96287 million (Annual Report, 2019). The fall of the total costs in 2019 was due to the reduction of the goodwill impairment cost, increment in the unrealized net gain, and decline restructuring cost (Annual Report, 2019). The increased operating expenses in 2018 resulted from the increased impairment costs of the goodwill of $21 billion, and an offset by $0.4 billion from the gain from the sale of a business segment (Annual Report, 2019). As a result of the total revenue and operating costs, GE reported an increased net loss of $22443 million in 2018 from $8849 million in 2017, and a loss of $4912 million in 2019, translating to an increased loss by 153.62% in 2018 and decline in 2019 o 78.11% (Annual Report, 2019).

Profitability Ratios

Profitability ratios are performance metrics for companies. The net loss margin indicates that GE earned a net loss of $0.089, $0.23, and $0.052 in 2017, 2018, and 2019, respectively, in every dollar revenue reported. It means that GE's operating costs were more than the total revenue each year for three years. The management was unable to manage costs to improve profitability. The return on assets was -7.2% and -1.8% in 2018 and 2019, respectively. The return on assets implies that in every dollar of assets invested in 2018, GE earned a net loss of $0.07 and $0.018 in 2019. On the same note, the return on equity suggests that GE made a net loss of $0.436 and $0.164 in 2018 and 2019 relative to the total owners' equity in 2018 and 2019. In terms of management effectiveness of GE, the profitability ratios depict that the company did not maximize returns from its investment in assets. The company should consider minimizing expenses, which are significantly higher compared with the total revenue.

Balance Sheet

The balance sheet is a fundamental financial statement that shows the financial health or position of an entity. It has three essential items, namely, assets, liabilities, and owners' equity. The total of liabilities and equity equates to the total assets. GE's total assets expanded reduced by 14.5% in 2019 from $311072 million in 2018 to $266048 (Annual Report, 2019). The total assets' decline was due to a significant contraction in the financing receivables by 59.3% in 2019, goodwill by 21.3%, and Assets of discontinued operations by 93.6%. A substantial number of assets lowered in 2019 due to sale of a business section in 2019 and impact of foreign currency transactions.

Liquidity Ratios

Liquidity ratios are balance sheet ratios that reflect the short-term liquidity of a business in a given period. The two primary liquidity ratios are the current and quick ratios. The current ratio is 2018 and 2019 was 1.8 and 1.7, respectively. A typical current ratio should be 2:1 (Tracy, 2012). However, a rate above 1:1 demonstrates a strong financial position in the short-run. In the case of GE, the current ratio shows that the company reported more current assets than the current liabilities. GE possessed enough short-term assets to cater to short-term obligations when they fall due in both years. However, performance in 2018 was better than in 2019. The reason for the decline is the unproportionally increment of the current assets in 2018 compared with the increase in the short-term obligations in 2019. In 2019, the current assets rose by 16.8%, while the current liabilities increased by 22.8%. The rise in the current liabilities off-set the expansion o the current assets, leading to the decline in the current ratio. The quick ratio is another liquidity ratio measuring the capability of an entity to settle short-term obligations using quick assets. The quick ratio was 1.6 and 1.5 in 2018 and 2019, respectively. The standard quick ratio should be 1:1 (Tracy, 2012). In this case, GE quick ratio for the two years was sufficient to pay off immediate liabilities when they fall due. The liquidity position for the company was better in 2018 was higher than in 2019, thus a better performance than in 2019. The unproportionally increment of the current assets in 2018 compared with the increase in the short-term assets in 2019 is the cause of the declined quick ratio in 2019. In 2019, the existing assets rose by 19%, while the current liabilities increased by 22.8%.

Solvency Ratios

Solvency ratios are balance sheet metrics gauging the capability od entities to meet its long-term liabilities. The debt to equity ratio is a solvency metric highlighting the portion of the total assets funded by external capital. The obligation to equity ratio for GE was five times and 7.9 times in 2018 and 2019. It implies that GE used more borrowed money in financing its assets, with 2019 having the highest gearing ratio. Excessive debt in the capital structure than equity capital increases leverage risk, and it's a sign of weak solvency (Robinson, 2020). When the debt level is too high, the commitment of the company in repayment of the borrowing increases, which is dangerous during turbulent economic times. During the recession, an organization has to repay the principal and interest amount as stipulated in the loan agreement, whether it is profitable. The ratio demonstrates that GE only used 20% and 10% equity to finance its total assets in 2018 and 2019. The company funded the rest of the assets 80% and 90%, respectively, using borrowings. The debt level increased in 2019 compared with 2018. However, the analysis shows that GE is a risky investment, given its increased gearing ration on both years. During economic hardship, it is likely to collapse from the considerable cash outflows committed to payment of borrowings.

Efficiency Ratios

The assets turnover ratio for GE was 0.31 and 0.33 in 2018 and 2019, respectively. it means that GE was able to generate a revenue of $0.31 in 2018 and $0.33 in 2019 for every dollar invested in the total assets. The increase in the assets turnover ratio demonstrates the improved of the GE management to use asset to earn revenue for the company. Although GE revenue and total assets declined in 2019 from 2018, the magnitude of reduction was higher was higher for the average total assets at 7% and 2% for the total sales revenue, which is the reason for the lowered assets turnover ratio. The inventory turnover is a financial metric that showcase the rate the company is converting inventory to sales, which is an indication of how long a company should take to manufacture and sell inventory (Wahlen et al., 2014). The calculation of the inventory turnover for GE reveals that the ratio was 3.6 and 3.5 in 2018 and 2019, respectively. When translated into number of days, GE held inventory at hand for 100 days in 2018 and 105 days in in 2019. In this regard, GE took shorter period to convert inventories into sales in 2018 compared with 2019. It implies that inventories rose in 2019 from 2018. The cash turnover for GE was 3.1 and 2.6 in 2018 and 2019, respectively. It implies that GE replenished its cash balance after every 117 days in 2018 and 139.5 days in 2019.

Statement of Cashflows

The statement of cash flows has three categories; cash flows from operating activities, cash flows from investment, and cash flows from financing activities. The primary source of funds used by GE are;

• Borrowings
• Receipts from customers
• Issuance of shares
• Disposal of business operations and assets

Issuance of the Financial Statements

According to the GE annual report, the management of GE is responsible for preparing and presenting the consolidated financial statements and other relevant information crucial for decision making through the annual report. The management should make a reasonable judgment and estimates when including the amounts in the financial statements. Besides, the preparation of the financial report should adhere to the United States GAAP. GE ensures the issuance of reasonable estimates when reporting by establishing a robust system of internal control.

Assurance for Conformity with GAAP

The external auditor is responsible for assessing the prepared financial report is free from material misstatement, and it conforms to GAAP. In this regard, KPMG LLP was the external auditor for GE in 2019. KPMG audited GE annual report for the year. KPMG assessed and offered an independent opinion on whether GE financial statements the accurate and fair financial position it purports to represent by issuing auditor's report.

The Importance of Notes to the Financial Statements

Notes to the financial statements are essential in clarifying the additional information not stipulated in the preparation of the financial statements. Notes provide detailed disclosure of the financial statements reported in the income statement. For instance, in the GE 2019 annual re...