Corporate Financial Management: GE Risk and Valuation Analysis

This report offers a comprehensive financial analysis of the General Electric Company, examining its financial performance, position, and strength. It begins with an executive summary and table of contents, followed by an introduction outlining the report's objectives. The analysis is divided into four parts. Part 1 assesses GE's risk profile, including business risks (sales growth, EBIT analysis, operating leverage), systematic risks (beta analysis), and financial risks (financial leverage, capital gearing). Part 2 focuses on valuation, employing net asset value, dividend valuation, price-earnings ratio, and cash flow-based models. Part 3 explores GE's investment strategies, capital structure, mergers and acquisitions, and Part 4 analyzes the company's dividend policy. The report uses figures and tables to present data from the annual reports, providing insights into GE's corporate strategies and financial health. This analysis can help in understanding the financial position and strength of the company, and helps in assessing the corporate strategies and risk mitigation measures undertaken by the company.

Running head: CORPORATE FINANCIAL MANAGEMENT
Corporate Financial Management
Name of the Student:
Name of the University:
Author’s Note:

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Executive Summary:
This report has been prepared to analyse various financial measures of the General
Electric Co. to understand and interpret the financial performance, finance position and
financial strength of the company. A risk profile analysis has been conducted to understand
the level of risk the company is assuming and the return relevant to that risk. Various
measures and parameters have been used for analysing the internal risks as well as market
related risks classifying them into systematic risks and unsystematic risks. Further a valuation
has been made using various valuation methods to find out the intrinsic value of the business
of the General Electric Co. which can be compared with the market price of their share to
make an investment decision. Lastly, a detailed analysis of the mergers and acquisitions made
by the company has been conducted to understand their corporate strategies in changing
scenarios along with an analysis of their dividend policies.

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Table of Contents
Introduction................................................................................................................................5
Part 1:.........................................................................................................................................5
i) Sales growth rate and sales forecast...................................................................................5
ii) Business Risk.....................................................................................................................6
iii) Systematic Risks...............................................................................................................9
iv) Financial Risks................................................................................................................10
v) Ratio Analysis..................................................................................................................12
vi) Actions that the management should take to manage risk..............................................14
Part 2:.......................................................................................................................................14
i) Net Assets Value Method.................................................................................................15
ii) Dividend Valuation Model..............................................................................................16
iii) Price Earnings Ratio Model............................................................................................16
iv) Cash flow based model...................................................................................................17
Part 3:.......................................................................................................................................18
i) Investment.........................................................................................................................18
ii) Capital Structure..............................................................................................................19
iii) Merger and acquisition by the General Electric Company............................................20
Part 4:.......................................................................................................................................21
i) Analysis of the dividend policy........................................................................................21
References:...............................................................................................................................22

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Table of Figures
Figure 1: Sales growth and sales forecast..................................................................................5
Figure 2: Comparison between EBIT and Sales Revenue.........................................................6
Figure 3: Degree of Operating Leverage of General Electric Company...................................7
Figure 4: Operating profit of the General Electric Company....................................................7
Figure 5: Beta analysis of the General Electric Company.........................................................9
Figure 6: Degree of Financial Leverage of the General Electric Company.............................10
Figure 7: Capital Gearing Ratio of the General Electric Company.........................................11
Figure 8: Trend in Capital Gearing Ratio................................................................................12
Figure 9: Current Ratio of the General Electric Company......................................................12
Figure 10: Trend in Current Ratio............................................................................................13
Figure 11: Net Assets Value of the General Electric Company...............................................14
Figure 12: Valuation of shares under Dividend Growth Model..............................................15
Figure 13: Valuation of shares under Price Earnings Ratio Model.........................................16
Figure 14: Valuation under discounted cash flow method.......................................................17
Figure 15: Net Worth and Market Price of Shares...................................................................18
Figure 16: Debt Equity Mix.....................................................................................................18
Figure 17: Top 10 deals by the General Electric Company.....................................................19
Figure 18: Graph showing Mergers and Acquisitions.............................................................20

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Introduction
Every business organisation has to assume certain level of risk to continue their
business and to achieve their business objectives. This report has been prepared base on the
analysis of the risk profile of the General Electric Company. It also includes the valuation of
business of the General Electric Company and a detailed analysis of their corporate strategies
in growing up their business through various generic and non-generic ways. In the first part
the risk profile analysis for the General Electric Company has been made, and then the
valuation of business of the General Electric Company can help in understanding the
financial position and strength of the company. Lastly, the analysis of the merger and
acquisitions and dividend policy of the company can help in understanding the corporate
strategies of the company is achieving a sustainable growth for their business.
Part 1:
The risk profile of the General has been analysed classifying into two parts, business
risks and systematic risks. For such an analysis of the risk profile of the General Electric
Company, information has been taken from the annual report and financial statement of the
company. Various figures and measures from the annual reports has been taken for analysing
the risks and presented using tables and graphs as follows.
i) Sales growth rate and sales forecast
It can be observed from the last five years sales of the General Electric that that is a
decrease or a negative sales growth. The average sales growth as have been computed in the
table below is -4.04%. Assuming that the same trend will be prevailing in the future years,
the sales forecast have also been shown in the table below.

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Figure 1: Sales growth and sales forecast
ii) Business Risk
Business risks are related to the internal operations and operating performance of the
business. Internal operations and operating results of a company can be known and
understood from the profitability figures available in the financial statement of the company.
Therefore, to analyse the and understand the business risk of the General Electric Company,
various figures such as EBIT, Sales figure and growth in sales has been taken for the past five
years from the annual report of the General Electric Company.
In the following graph a comparison between the sales revenue and the operating
profit or the EBIT has been presented to measure the business risk for the General Electric
Company.

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2015 2016 2017 2018 2019
$ -
$ 20.00
$ 40.00
$ 60.00
$ 80.00
$ 100.00
$ 120.00
$ 140.00
Operating Profit (EBIT)
Sales Revenue
Figure 2: Comparison between EBIT and Sales Revenue
From the above figure it can be observed that the sales revenue of the General Electric
has been increasing since the year 2015 till the year 2018 and thereafter a sharp decrease in
sales revenue can be observed. On the other hand, the operating profit of the company or the
EBIT has been decreasing since the year 2015 till the year 2017. After the year 2017, a
marginal increase in operating profit can be observed in the year 2018, but again it has been
decreased significantly in the year 2019. Hence, the volatility in the operating profit or the
EBIT can be considered as the risk coefficient in the profitability of the company. As a rapid
change and a significant fall in profitability of the General Electric Company can be observed
from the above analysis, it can be considered as a measure of business risk for the company.
Degree of Operating Leverage measures the volatility of the operating results due to
change in the sales revenue or the volume of operations. Hence, the degree of operating
leverage can also be used as another measure of the business risk of the General Electric
Company. In the following table the degree of operating leverage of the General Electric
Company has been computed for the last four years taking the information from the annual
report of the last five years starting from the year 2015 to the year 2019.

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Figure 3: Degree of Operating Leverage of General Electric Company
It can be observed from the above analysis that only in the year there was a positive
and significant increase in the operating revenue as a result of chance in the sales revenue,
though again it has been fallen significantly in the year 2019. In the year 2016 and 2017, the
operating leverage was negative, which implies that increase in sales resulted into a decrease
in operating profit.
To analyse further the business risk of the General Electric Company as with the
comparison to the market risk and competition, the operating profit of the company can be
plotted as follows.
2015 2016 2017 2018 2019
$ -
$ 2.00
$ 4.00
$ 6.00
$ 8.00
$ 10.00
$ 12.00
$ 14.00
$ 16.00
Operating Profit
Figure 4: Operating profit of the General Electric Company
The General Electric Company is a well established brand in the heavy electric and
electrical equipments worldwide. It can be observed from the above graph that, the operating
profit of the company has been decreased significantly in the last five years. With some

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strategic changes in their operations, they managed to make an increase in the operating
profit in the year 2018 but again it has been fallen in the year 2019.
It can be recommended to go for merger and acquisition of domestic brands and
companies in the countries it is operating to widen their market share which will boost their
revenue and in turn will help them to increase their operating profit. All those measures can
be recommended as a risk reduction strategy for the General Electric Company to mitigate
their business risks.
iii) Systematic Risks
Systematic risks are those effects which arise from the movement in the market
related parameters. In other words, systematic risks are market related risks which effects all
the companies and shares in a particular market. Systematic risks can also be considered as
the external risk for a business. The company do not have any influence and impact on those
parameters and every firm or companies in that market get impacted by such changes. The
best measure of the systematic risk can be made by the “Beta” of the share price movement.
The Beta represents the volatility of the stock price of a company as compared to the market
index or the movement of all the stock prices in that market. The Beta for the market is
always considered as 1, and it is assumed that a company Beta less than 1 is more acceptable.
In the flowing table the Beta values or the risk coefficient of the systematic risk of the
General Electric Company has been presented. The company Beta of the General electric
Company has been computed based on the historical daily adjusted closing price of the shares
of the General Electric Company. The standard deviation of the daily adjusted price has been
considered as the risk coefficient of the company.

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Figure 5: Beta analysis of the General Electric Company
It can be observed that the risk coefficient of the company, or the measure of the
systematic risk or the market risk of the company was more than 1 in the most of the years. In
the year 2015, the company Beta was 1.89, and it has been decreased marginally with the
increase in share price of the company and relatively less fluctuation in the share price of the
company in the year 2016. With a significant fall in profitability of the company in the year
2017, the rapid share price fluctuation and movement resulted into a higher Beta coefficient
of the company in the year 2017 and it has been increased to 3.50. in the year 2018 a
marginal improvement in the systematic risk of the company can be observed from a
marginal decrease in the Beta of the company and in the year the Beta of the company has
been decreased to 0.93 which is less than 1. Therefore, in the year 2019, the steady price or
relatively less share price movement of the company resulted into a better market risk
position for the General Electric Company.
Therefore, from the above analysis it can be evidenced that the General Electric is
operating at a higher risk measures both in terms of internal business risks as well as in terms
of systematic risks or market related risks. Hence, they must be making such strategies which
will be helping them to improve in their risk perceptions and risk measures though a marginal
improvement in market risk can be observed in the year 2019.
iv) Financial Risks
Financial risks are mainly associated with the capital structure and the solvency of the
company. Therefore, to analysis the financial risk of the General Electric Company, the
capital structure and its effect on the earnings of the company has been analysed. The best
way to measure the financial risk of a company is to use the Degree of Financial Leverage as
a parameter. The degree of financial leverage, measures the impact of capital structure
decisions on the profitability of the company. The degree of financial leverage is computed

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using the earnings before interest and tax and the earnings before tax. For the analysis of the
financial leverage of the General Electric Company, the EBIT and the EBT has been taken
for the last five years starting from the year 2015 to 2019. Following table shows the degree
of financial leverage of the General Electric Company for the last five years.
Figure 6: Degree of Financial Leverage of the General Electric Company
Degree of financial leverage implies the impact of debt equity mix in the capital
structure of a company to the profitability of the company. As per the net income approach of
the David Durand, the debt equity mix in the capital structure of a company can also be used
to maximise the return to the shareholders or to maximise the value of the business. It can be
observed from the above analysis that, the degree of financial leverage for the General
Electric Company was 1.78 in the year 2015, which implies a positive impact in the
profitability of the company with an increase in the debt capital in the total capital structure
of the company. With the fall in profitability, the degree of financial leverage has also been
fallen in the year 2016. With a negative profit before tax in the year 2017 and 2018, the
degree of financial leverage showed a negative measure, which implied increasing more debt
in the capital structure of the company would have resulted in more loss to the company.
Lastly, in the year 2019, with a significant positive profit before tax, the degree of financial
leverage represented a better financial position for the General Electric Company with a DFL
measure of 4.70.

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v) Ratio Analysis
To further analyse the risks and financial performance of the General Electric
Company, various financial ratios have been used, such as capital gearing ratio, price to
earnings ratio and the current ratio. Those ratios can explain and interpret the financial
position of the company and any significant change in the financial position of the company
for the last five years. To compute those financial ratios, information has been taken from the
annual report and the financial statements of the General Electric Company.
The figure 7, show the capital gearing ratio of the General Electric Company which
has been computed as the total debt of the company divided by the total equity of the
company. In the total debt mostly the long term liabilities of the company has been included
and the equity includes the shareholders’ fund plus reserves and surplus.
Figure 7: Capital Gearing Ratio of the General Electric Company
It can be observed that, the capital gearing ratio was 1.47:1 in the year 2015 and it has
been decreased in the year 2016 to 1.36:1 with a relatively higher decrease in the total debt of
the company. Later on, with further decrease in the total equity of the company, the capital
gearing ratio reached to 1.88:1 in the year 2018 and 2.30:1 in the year 2019. It implies, the
capital structure or the long term solvency of the company has been poorer in the recent years
as compared to the previous years. Following line chart can be used to present the trend in
capital gearing ratio of the General Electric Company for the last five years.

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2015 2016 2017 2018 2019
-
0.50
1.00
1.50
2.00
2.50
Capital gearing ratio
Figure 8: Trend in Capital Gearing Ratio
Current ratio can also be used to measure the short term solvency or the short term
financial position of a company. For calculating the current ratio, total current assets and total
current liabilities of the company for has been taken from the annual report of the General
Electric Company for the last five years. Following table shows the current ratio and its trend
for the General Electric Company for the last five years.
Figure 9: Current Ratio of the General Electric Company
From the above analysis, it can be observed that the General Electric Company was
having a current ratio of 1.62:1 in the year 2015 and it has finally reached to 1.78:1 in the
year 2019. Therefore, a marginal increase in short term solvency of the company can be
noticed in the last five years, though the current ratio of the General Electric Company never
crossed the ideal standard of 2:1. Following line chart can be used to present the trend in the
current ratio and short term solvency of the General Electric Company.

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2015 2016 2017 2018 2019
1.45
1.50
1.55
1.60
1.65
1.70
1.75
1.80
1.85
1.90
1.95
Current ratio
Figure 10: Trend in Current Ratio
From the above analysis, it can be concluded that, the company is assuming a
significant level of risks which is being depicted through the current ratio and a decreasing
trend in the short term solvency of the company can also be noticed.
vi) Actions that the management should take to manage risk
From the above analysis it can be easily evidenced that the sales revenue of the
company is decreasing and having a negative trend, the short term as well as the long term
solvency of the company is becoming poorer. Hence, to mitigate and manage risks, the
management of the company should formulate such marketing strategies which will be
boosting up their sales and will help in sales growth of the company. On the other hand, to
increase the value of the business, they must be taking such a capital restructuring plan which
will be increasing the solvency and liquidity of the company.
Part 2:
In this par the value of the business of the General Electric Company has been
analysed and ascertained using various methods. It can help the stakeholders and investors to
make important decisions related with the company.

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i) Net Assets Value Method
Net assets value is the difference between the total assets and external liabilities of a
company. It can also be termed as the net worth of the business. The net assets value is being
divided by the number of outstanding commons shares to find out the value of each share and
then to calculate the value of the business. A comparison has been made with the market
price and the market net assets value per share for understanding the movement in the market
price of the shares of the General Electric Company. In the following table the analysis of the
net assets value of the General Electric Company has been presented. All the amounts and in
billions except per value which are in USD.
Figure 11: Net Assets Value of the General Electric Company
It can be observed that, the Market price of shares of the General Electric Company
was always higher than the net assets value per share. With the decrease in net assets value
per share the market price per share has also been decreased. It implies the market price per
the effect of changes in financial position of the company has also been reflected in the
market price of shares of the General Electric Company.

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ii) Dividend Valuation Model
Dividend valuation model or dividend discounting model is another method of
calculating the value of the shares of a company. In following table the current years
dividend, risk free rate and company beta has been used to calculate the value of each
common share of the General Electric Company with an expected growth rate in dividend of
4%.
Figure 12: Valuation of shares under Dividend Growth Model
From the above analysis, it can be observed that, as the amount of dividend paid in the
last year was very minimal, the value of each share using the dividend growth model with an
expected 4% growth in dividend is coming to $0.78 only, whereas, the net assets value of
each share is $3.48.
iii) Price Earnings Ratio Model
In this model the price earnings multiple has been used to measure the value of each
shares of the company. Form the price earnings multiple of the industry and the earnings per
share of the company, the share price has been computed.

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Figure 13: Valuation of shares under Price Earnings Ratio Model
It can be observed that, as in most of the years except the year 2016 there was
negative earnings available per commons shares, the value of shares under the price earnings
model is coming to a negative, which resulted a huge difference between the price computed
under the price earnings ratio model and the market price of common shares.
iv) Cash flow based model
Cash flow based model discounts the expected cash flows of the company to ascertain
the value of the business. To apply the discounted cash flow model for ascertaining the value
of the business of the General Electric Company, the expected EBIT has been computed from
the forecasted sales and the expected return as calculated in the dividend discounting model
has been considered as the discounting rate. Following table shows the valuation of the
business under discounted cash flow model.

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Figure 14: Valuation under discounted cash flow method
Part 3:
In this part the agency problems of the General Electric Company has been analysed
in respect of the investment, capital structure and dividend policy of the company.
i) Investment
The company has been performing financially well since its incorporation. In recent
few years the company has been adopted various strategic measures in their business model
and investment policies, which negatively impacted the net worth of the company. As a
result, the shareholders started disinvesting in the company, which resulted in a significant
fall in the market price of the company. Form the following graph, it can be noticed, how the
business strategies of the company impacted in the share price and net worth of the company.

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2015 2016 2017 2018 2019
$ -
$ 20.00
$ 40.00
$ 60.00
$ 80.00
$ 100.00
$ 120.00
Net Assets Value
Market price (USD)
Figure 15: Net Worth and Market Price of Shares
ii) Capital Structure
Capital structure is the mix of debt and equity in the total capital base of a company. It
can be observed from the debt equity ratio of the General Electric Company that there was a
significant change in the debt equity mix of the total capital base of the company. Following
graph shows the trend in debt equity mix or the change in capital structure of the company.
2015 2016 2017 2018 2019
-
0.50
1.00
1.50
2.00
2.50
Debt Equity Mix
Figure 16: Debt Equity Mix

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Though the company adopted various strategies to better the finical position of the
company, at last it resulted into a poorer financial position in terms of the capital structure of
the company, which raises a valid question of agency problems.
iii) Merger and acquisition by the General Electric Company
General Electric Company is a group of company having its subsidiaries such as GE
Power, GE Oil and Gas, GE Energy Connection and many more. The biggest merger and
acquisition decision in case of the General Electric can be traced back to the year 1890 when
the company merged with their biggest competitor Thomas-Houston Electric Company.
There are various other mergers and acquisition which helped the company in growing up
their business and to capture the market in times needed. Following graphs can give an
overview of such mergers and acquisition by the General Electric Company.
Figure 17: Top 10 deals by the General Electric Company

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Figure 18: Graph showing Mergers and Acquisitions
Part 4:
i) Analysis of the dividend policy
It can be observed from the dividend payout of the company, that despite having
negative earnings per share in recent few years, the company was paying a significant amount
of cash dividend from the retained earnings of the company. Though it attracted the interest
of the investors, ultimately it resulted in to a poor net worth for the company as a whole and it
further reduced the value of the business of the General Electric.

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