By Dhirendra Kumar, Ph.D.
Balance sheet shows the health of the business as of a specific date – generally, quarterly or annually. Balance sheet presents the business assets and liabilities, and the net balance or equity. This equity could be positive or negative. Equity is also known as net worth.
Net worth = Assets + (Liabilities)
Assets are what business owns or possesses and liabilities are what the business owes to others. Net worth is the owner’s stake in the business. Stake in the business could also be a combination of owners’ and/or shareholders.
Financial ratios are used to estimate the financial strengths and weaknesses of a firm, so they are good indicators of a firm’s performance and financial situation. Ratios are commonly divided into five categories: Liquidity, Coverage, leverage, Operating and Expense to Sales. Most commonly used ratios are: Current and Quick which are sub-sets of Liquidity ratio. These ratios measure the availability and the quality of current assets to meet current obligations as they come due. So,
Current Ratio (CR) = CA/CL
Where, CA = Current Assets and CL= Current Liabilities
Quick Ratio (QR) = (CA – Inventory)/CL
Short-term creditors prefer a high current ratio to reduce their risk, but business leaders (shareholders) may prefer a lower current ratio so that more firm’s assets are working to grow the business. The current ratio values generally vary from industry to industry as well as within any industry. For example, cyclical industry like heavy equipment may maintain a higher current ratio to remain solvent during downturns.
Inventory is defined as short-term assets, but sometimes there are items that are difficult to liquidate quickly or obsolete items. So, Quick ratio is an alternative measure of liquidity and some creditors prefer to calculate both the ratios.
There are some limitations of financial ratios, so users must pay attention when using these financial ratios:
· These ratios always need some reference point to be meaningful, so most ratios must be compared to historical values of the same firm, the firm’s forecast and the firms in the same industry.
· Some industries may have seasonal impact on ratios, while most of the industries try to balance their accounts at the end of the accounting period. Such changes may distort the value of the ratio, so average values should be used whenever they are available.
· Financial ratios by themselves are not very meaningful. These ratios should be analyzed with other indicators to present the true firm’s status.
· These financial ratios are subject to the accounting methods followed in a firm. Different accounting methods may result in significantly different ratio values.
The concept of P&L Statement and the enterprise analysis through P&L statement are presented in Part I. So, the enterprise analysis through Balance Sheets is presented here.
The two major corporations used in this analysis are General Electric Company (GE) is Fairfield, CT based corporation and the United Technologies Corporation (UTC) (UTX – is a symbol for UTC in NYSE) is Hartford, CT based corporation. Their key business summaries are presented in Part I.
As pointed out in Part I that both corporations are very heavily involved in designing, manufacturing, marketing and servicing high technology products, but GE is also involved in financial (capital lending) business. P&L statements data of GE and UTX are analyzed in Part I of my blog on “Enterprise Analysis of Two Competing Corporations”. Balance Sheets data of General Electric (GE) and United Technologies (UTX) are presented in tables 3 and 4 respectively (Tables 1 and 2 are presenting P&L Statements data in Part I). So, Balance Sheets data are analyzed here to get some insight understanding about these enterprises.
Table 3. General Electric Co. Balance Sheets: 2007 – 2011
| GE Balance Sheet | |||||
| Source: | |||||
| http://www.marketwatch.com/investing/stock/GE/financials/balance_sheet | |||||
| Fiscal year is January – December. All values in USD in billions | |||||
| Description |
2011 |
2010 |
2009 |
2008 |
2007 |
| Cash & short-term investment |
61.18 |
89.63 |
124.20 |
122.90 |
131.88 |
| Receivable |
22.26 |
21.41 |
16.46 |
18.62 |
19.53 |
| Inventories |
12.90 |
13.67 |
11.99 |
11.53 |
13.79 |
| Other Current Assets |
– |
– |
– |
– |
– |
| Total Current Assets |
96.34 |
124.71 |
152.65 |
153.05 |
165.20 |
| Gross Property, Plant & Equipment |
119.60 |
125.67 |
113.32 |
110.05 |
108.12 |
| Accumulated Depreciation |
41.71 |
47.14 |
44.10 |
43.83 |
42.38 |
| Net Property, Plant & Equipment |
77.89 |
78.53 |
69.22 |
66.22 |
65.74 |
| LT Investment and Advances |
67.94 |
75.74 |
76.46 |
71.52 |
86.56 |
| Other LT note Receivable/Assets |
396.52 |
381.22 |
345.47 |
320.10 |
289.26 |
| Goodwill & Intangible Assets |
97.29 |
96.74 |
77.50 |
74.45 |
84.69 |
| other Assets |
59.36 |
40.82 |
60.53 |
65.89 |
25.80 |
| Total Fixed Assets |
699.00 |
673.05 |
629.18 |
598.18 |
552.05 |
| Deferred Taxes – Debit |
22.07 |
24.67 |
26.05 |
27.76 |
30.69 |
| Total Assets |
817.41 |
822.43 |
807.88 |
778.99 |
747.94 |
| Liabilities & shareholders’ Equity | |||||
| ST Debt & Current Portion LT debt |
195.10 |
193.70 |
133.05 |
128.46 |
148.33 |
| Accounts Payable |
21.40 |
20.82 |
19.70 |
14.66 |
16.40 |
| Income Tax Payable |
– |
– |
– |
– |
– |
| Other Current Liabilities |
29.61 |
34.10 |
26.72 |
24.10 |
27.00 |
Table 3 Cont’d. General Electric Co. Balance Sheets: 2007 – 2011
| GE Balance Sheet | |||||
| Source: | |||||
| http://www.marketwatch.com/investing/stock/GE/financials/balance_sheet | |||||
| Fiscal year is January – December. All values in USD in billions | |||||
| Description |
2011 |
2010 |
2009 |
2008 |
2007 |
| Total Current Liabilities |
246.11 |
248.62 |
179.47 |
167.22 |
191.73 |
| Long-term Debt |
319.02 |
330.07 |
338.22 |
312.88 |
305.12 |
| Provision for Risk & Charges |
21.51 |
22.54 |
24.92 |
25.36 |
39.43 |
| Deferred Taxes |
12.14 |
4.58 |
2.17 |
2.84 |
(0.13) |
| Other Liabilities |
72.99 |
78.35 |
111.90 |
118.72 |
62.97 |
| Other Liabilities – Deferred Taxes |
22.07 |
24.67 |
26.05 |
27.76 |
30.69 |
| Total Long-term Liabilities |
447.73 |
460.21 |
503.26 |
487.56 |
438.08 |
| Total liabilities |
693.84 |
708.83 |
682.73 |
654.78 |
629.81 |
| Non-Equity reserves |
– |
– |
– |
– |
– |
| Preferred Stock (carrying value) |
– |
– |
– |
– |
– |
| Total Shareholders’ Equity |
115.56 |
104.67 |
117.29 |
118.94 |
116.44 |
| Accumulated Minority Interest |
8.00 |
8.95 |
7.85 |
5.26 |
1.70 |
| Total Equity |
123.56 |
113.62 |
125.14 |
124.20 |
118.14 |
| Liabilities & Shareholders’ Equity |
817.40 |
822.45 |
807.87 |
778.98 |
747.95 |
| Liquidity Ratio | |||||
| Current Ratio (CR) = CA/CL |
0.4 |
0.5 |
0.9 |
0.9 |
0.9 |
| Quick Ratio (QR) = (CA-Inventory)/CL |
0.3 |
0.4 |
0.8 |
0.8 |
0.8 |
Table 4. United Technologies Corp. Balance Sheets: 2007 – 2011
| United Technologies Corp. (UTX) Balance Sheet | |||||
| Source: | |||||
| http://www.marketwatch.com/investing/stock/UTX/financials/balance_sheet | |||||
| Fiscal year: January – December | Annual information, USD in Billions | ||||
| Description |
2011 |
2010 |
2009 |
2008 |
2007 |
| Cash & short-term investment |
6.000 |
4.160 |
4.490 |
4.330 |
2.900 |
| Receivable |
9.550 |
9.030 |
8.690 |
9.480 |
8.840 |
| Inventories |
7.800 |
7.770 |
7.510 |
8.340 |
8.100 |
| Other Current Assets |
2.420 |
2.560 |
2.510 |
2.320 |
2.220 |
| Total Current Assets |
25.770 |
23.520 |
23.200 |
24.470 |
22.060 |
| Gross Property, Plant & Equipment |
15.980 |
15.910 |
15.680 |
15.110 |
14.880 |
| Accumulated Depreciation |
9.780 |
9.630 |
9.310 |
8.760 |
8.580 |
| Net Property, Plant & Equipment |
6.200 |
6.280 |
6.370 |
6.350 |
6.300 |
| Total Investment and Advances |
0.670 |
0.731 |
0.712 |
1.000 |
0.596 |
| Other LT note Receivable |
0.670 |
0.416 |
0.375 |
– |
0.367 |
| Goodwill & Intangible Assets |
21.860 |
21.780 |
19.840 |
18.810 |
19.880 |
| other Assets |
4.010 |
3.810 |
3.180 |
2.580 |
4.240 |
| Total Fixed Assets |
33.410 |
33.017 |
30.477 |
28.740 |
31.383 |
| Deferred Taxes – Debit |
2.390 |
1.970 |
2.100 |
3.630 |
1.130 |
| Total Assets |
61.570 |
58.507 |
55.777 |
56.840 |
54.573 |
| Liabilities & shareholders’ Equity | |||||
| ST Debt & Current Portion LT debt |
0.759 |
0.279 |
1.490 |
2.140 |
1.130 |
| Accounts Payable |
5.570 |
5.210 |
4.630 |
5.590 |
5.060 |
| Income Tax Payable |
0.547 |
0.504 |
0.348 |
0.307 |
0.450 |
| Other Current Liabilities |
11.740 |
11.740 |
11.440 |
11.760 |
10.830 |
Table 4 Cont’d. United Technologies Corp. Balance Sheets: 2007 – 2011
| United Technologies Corp. (UTX) Balance Sheet | |||||
| Source: | |||||
| http://www.marketwatch.com/investing/stock/UTX/financials/balance_sheet | |||||
| Fiscal year: January – December | Annual information, USD in Billions | ||||
| Description |
2011 |
2010 |
2009 |
2008 |
2007 |
| Total Current Liabilities |
18.616 |
17.733 |
17.908 |
19.797 |
17.470 |
| Long-term Debt |
9.500 |
10.010 |
8.260 |
9.340 |
8.020 |
| Provision for Risk & Charges |
5.010 |
3.590 |
4.150 |
6.570 |
2.560 |
| Deferred Taxes |
(2.390) |
(1.970) |
(2.100) |
(3.630) |
(1.130) |
| Other Liabilities |
5.150 |
4.510 |
4.050 |
4.200 |
4.260 |
| Other Liabilities – Deferred Taxes |
2.390 |
1.970 |
2.100 |
3.630 |
1.130 |
| Total Long-term Liabilities |
19.660 |
18.110 |
16.460 |
20.110 |
14.840 |
| Total liabilities |
38.276 |
35.843 |
34.368 |
39.907 |
32.310 |
| Non-Equity reserves |
– |
– |
– |
– |
– |
| Preferred Stock (carrying value) |
– |
– |
– |
– |
– |
| Total Shareholders’ Equity |
21.880 |
21.390 |
20.070 |
15.760 |
21.360 |
| Accumulated Minority Interest |
1.300 |
1.260 |
1.320 |
1.160 |
0.912 |
| Total Equity |
23.180 |
22.650 |
21.390 |
16.920 |
22.272 |
| Liabilities & Shareholders’ Equity |
61.456 |
58.493 |
55.758 |
56.827 |
54.582 |
| Liquidity Ratio | |||||
| Current Ratio (CR) = CA/CL |
1.4 |
1.3 |
1.3 |
1.2 |
1.3 |
| Quick Ratio (QR) = (CA-Inventory)/CL |
1.0 |
0.9 |
0.9 |
0.8 |
0.8 |
As you analyze the financial data presented in tables 3 and 4 whiling knowing the data presented in tables 1 and2, you will observe some distinctions between GE and UTX as listed below:
- GE’s total current assets requirements are much higher than UTX, Table 5.
Table 5. Relationship between Revenue and the Total Current Assets
| Description | FY – 2007 | Current Assets as a % of revenue | FY – 2011 | Current Assets as a % of revenue |
| GE Revenue | 169.72B | 142.24B | ||
| Current Assets | 165.20B | 97 | 96.34B | 68 |
| UTX Revenue | 53.92B | 58.09B | ||
| Current Assets | 22.06B | 41 | 25.77B | 44 |
- Similarly, GE is very heavy in total fixed assets, total current liabilities and total long-term liabilities compare to UTX.
- Current Ratio (CR): GE’s Current Ratio dropped from 0.9 in 2007 to 0.4 in 2011 which means that GE has borrowed a lot of capital. Creditors would like CR to be minimum 1.0, but prefer larger than 1.0. UTX’s Current Ratio was fluctuating between 1.2 and 1.4 which creditors like it and it is considered good.
- Quick Ratio (QR): This is the situation where creditors compare current assets without inventory with current liabilities. Creditors want to know “How solid is the business?” Creditors would like to see this ratio equal to 1.0 or greater. In the case of GE, the value of QR dropped from 0.8 to 0.3 while UTX’s range was 0.8 to 1.0.
A high level analysis is presented in two-part series utilizing the P&L statements and Balance Sheets. This type of analysis is very useful and similar analysis can be done in other companies either in the same industry or in some other industry. In a public corporation, this type of financial information is very easily available, so it is easy to perform this type of analysis.
