Enterprise Analysis of Two Competing Corporations Part II – through Balance Sheets

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.

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