General Electric Executive Summary

By: William Quinn

MBA 510 – Financial Accounting

August 10, 2009

 General Electric (GE) is one of the few companies that can truly be considered a

conglomerate. Its business reach spans across the globe, with its businesses in 160

countries and involvement in 24 different industries ranging from cable broadcasting and

banking to aviation and appliances. GE’s massive diversification was created in part to

enable it to weather difficult economic storms where other, more specialized companies

may not. As of late last year, that difficult economic storm hit.

The recent economic credit crisis has had a dramatic affect upon the global

community. Nearly all segments of industry have been affected and forced to hunker

down to prepare for difficult times ahead, yet none more so then the financial industry.

Even global giant GE, has been forced to perform major reorganization. With a financial

arm accounting for nearly 55% of its profits in 2007, GE quickly found itself in uncharted

territory. In years past GE had used its capital finance business (GECS) to make up for

other businesses shortcomings. If the industrial side were down, GECS would stage a last

minute sale of assets to make up the difference, thus always helping the company meet its

projected numbers. This past practice was made glaringly public with the recent

economic crisis when GE’s profit fell 6% in the first quarter of 2008.

So what does this financial crisis mean for the future of GE? First it means the

reduction of the capital finance arm to comprising of no more then 30% of company

profits. The financial industry will never be the same. Increased government intervention

and regulations will change the way the business is conducted. Companies such as GE

that were able to operate outside of the regulations imposed upon other banks will have to

adjust to being governed by more stringent oversight.

 Second, it means that the Infrastructure businesses will be forced greatly reduce

cost due to the overall decline in the customers ability finance goods and services. When

customers cannot afford to spend money, they look to cut costs on high dollar items.

They make due with what they have. Airlines ground planes, because the maintenance is

too costly and there are not enough passenger to fill them. Hospitals cut spending and

rely on older equipment. While the outlook for this industry may look bleak in the short

term, the long term promises to be profitable. GE continues to have a backlog of orders

for new aircraft engines and engine maintenance is a necessity that will return to normal

when the economy begins to level back out.

Third, “Cash is King” companies will be forced to carry large amounts of cash in

order to cover their debt. In 2008 GE raised $15 billion by issuing preferred and common

stock. Additionally they cut quarterly dividends in the second half of 2009 to save

approximately $9 billion of cash per year. These actions combined with many others will

help ensure the future success of the business.

With these concepts and changes in mind for GE’s major industries, how did GE

compare to its competitors in 2008? Unfortunately, because of the large stake that the

capital finance business has in GE, the company as a whole has been lumped in with the

financial companies and has been treated as a solely financial company, thus that is

whom we will compare them to.

Currently GE’s stock is valued at $14.51 with Bank of America’s at $16.66 yet as

you can see by the chart below, GE consistently prevails in regards to key financial

measures of the strength of a company. With the financial crisis GE has been attacked by

investors as though it is a completely financial company like Bank of America and

Citigroup, yet they often fail to recognize Key Measures GE BAC
EPS 1.32 0.35
that there is are industrial and services sides Revenue 180.92 B 112.99 B
EBIDTA 57.15 B 15.85 B
Operating Margin 24.54% 4.64%
to the business that earned $10.28 billion in
Profit Margin 9.62% 3.55%
Net Income 17.41 B 4.008 B
net income in 2008 that works to balance out
LT Debt to Equity Ratio 302.73 227.59
Total Debt to Capital 82.17 78.14
the business woes on the financial side. GE ROE 16.76 1.86
ROA 3.55 0.8
maintained a strong operating margin, ROE ROIC (Return on Invested Capital) 5.4 1.34

and ROA, and EBIDTA. The one major area of concern is GE’s Debt to Equity Ratio and

Total Debt to Capital. This tells us that the majority of the company’s assets are financed

through debt. While on paper this may be a scary number, as I referenced above, GE has

taken great measures to raise adequate cash to cover all long-term debt for the upcoming

year. Just from 2007 to 2008 reporting periods GE increased its Cash for Continuing

Operations from $15.731 billion to $48.187 billion.

Overall GE had a disappointing 2008 when compared to previous years and will

likely continue down the same path for the remainder of 2009. GE has become staple in

the market for increased growth year after year, and 2008 was the first year that they

failed to produce. Net income dropped by 22% and Earnings Per Share by 21%. Already

in 2009 they have lost their coveted AAA credit rating and have been forced to cut their

dividend by 68% and stock prices have plummeted by nearly 50%. Yet, even with all of

these negatives, GE still managed to create approximately $181 billion in revenues and

$17.41 billion in profit. Even the Capital Finance side managed to make $7 billion in

profit when many financial institutions are struggling to be profitable.

 My recommendation to the Board is that GE is a strong business institution that

will be able to weather the current economic storm and come out of it a smarter, leaner

and more profitable company. Their ability to raise cash to cover their long-term debts,

and consistently high profit numbers makes them a positive investment opportunity.

Works Cited

• GE 2008 Annual Report. General Electric. 31 July. 2009.

<http://www.ge.com/ar2008/pdf/ge_ar_2008.pdf>

• “Bank of America Corp: Financial Statement,” MSN Money Investing. Thomson

Reuters. 5 August. 2009.

http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?

Symbol=bac&lstStatement=Income&stmtView=Ann

• “Bank of America Corporation Top Competitors” AOL Money & Finance. AOL

LLC. 6 August. 2009. http://finance.aol.com/company/bank-of-america-

corporation/bac/nys/top-competitors

• “General Electric Losing its Magic Touch.” The Economist. The Economist

Newspaper and The Economist Group. 19 Mar. 2009. 1 Aug. 2009.

www.economist.com/PrinterFriendly.cfm?story_id=13326788