Financial Analysis between Philips and GE Company

 

 

 

 

 

Financial Analysis between Philips and GE Company

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Introduction

General Electric Company (GE) founded in 1892 by the merger of two electric companies i.e. Thomson-Houston Electric Company, and Thomas Alva Edison’s Edison GE is an American Multinational Conglomerate. Its products and services ranges from energy (e.g. gas and oil), technology infrastructure (e.g. healthcare and aviation), media (e.g. cable and film), home and business solutions (appliances and intelligent platforms) and finance (Gitman, & McDaniel, 2009).  It operates worldwide in about 160 countries.

Philips Company founded by Frederik Philips and his son Gerard Philips in 1891 is a major Dutch manufacturer. It manufactures consumer electronics, medical image equipment, lighting equipment, electronic components, household appliances, and computer and telecommunications equipment. Just like GE, it operates in over 100 countries worldwide. The two companies’ performance can be compared by use of financial ratios like liquidity ratios, profitability ratios, security ratios, asset ratios and debt ratios.

Liquidity Ratio

It is used to measure the ability of a company to meet its short-term debt responsibilities.  The ratios explain the company’s ability to pay off its short-term liabilities when they are due. For instance, it gives the company’s position to meet its current liabilities in the form of ratios. When the liquidity ratios are greater than one, indicate the company is in a good financial position. Examples of ratios that measure liquidity of the company include quick ratio, current ratio, working capital ratio and cash ratio(Albrecht, 2007). Comparison between the Philips and GE liquidity ratio is as follows.

 

Formula

Philips

Calculation

General

Electric

Calculation

Ratio

Measure

Philips

Ratio

Value

General

Electric

Ratio Value

Current Ratio= C A

C L

=19237

12931

= 380711

145735

Current

1.49times

2.61times

Quick Ratio= CA – I

CL

19237-3354

12931

= 363454

145735

Quick

1.23times

2.5times

Where CA – current asset

CL – current liability

I –    inventory

Current ratio

This is balance sheet financial performance measure of company liquidity. It measures if or not a company over the next 12 months can pay its debts by its resources(Albrecht, 2007). From the table, the current ratio of Philips is 1.49 meaning is in a stable position to meet its short-run debt obligation. GE has ratio of 2.61 meaning; it is in a good liquidity position. Comparing the two, GE is in a better position to meet short-term obligation as compared to Philips Company.

Quick ratio

Also known as ‘Acid test ratio’, measures current liquidity and position of the company that is less the inventory. It shows how well a company can pay off its current liabilities by converting its assets into cash(Gibson, 2009). Philips Company has the quick ratio of 1.23 meaning the ratio is greater than 1 therefore it can meet its obligation relying more on its currents receivable that is the stock. GE has a ratio of 2.5 can also meet its obligation like Philips Company. GE has a good liquidity position compared to Philips Company.

From the two ratios, we can conclude that GE has a better Liquidity ratio compared to Philips Company.

Profitability Ratios

Profitability ratios measure a firm’s ability to generate earnings relative to sales, equity, and assets. The ratios assess the company’s to generate revenues, cash flows and earnings relative to the amount invested. Examples of these ratios include profit ratio, earning power, return on investment of assets, and return on common equity(Albrecht, 2007). Philips and GE profitability ratios can be compared as follows;

 

Formula Philips

Calculation

General

Electric

Calculation

Ratio

Measure

Philips

Ratio

Value

General

Electric

Ratio Value

ProfitRatio=NI

S

=3726

157795

=13057

145715

Profit

2.36 %

9 %

E. P = PBIT

TA

=5526

49798

=16151

656560

Earning

power

11.1 %

2.46 %

ROA = NI

TA

=3726

49798

=13057

656560

Return on

Asset

7.48 %

2 %

ROE = NI

CE

=3726

21950

=13057

130566

Return on

Investment

17 %

10 %

Where N I – Net incomeROA –Returnon investments of assets

S – sales                                                      T A   – Total assets

E .P – Earning power                                  ROE   – Return on common equity

PBIT – profit before interest and tax            CE    –   Common equity

Profit Ratio

It is usually displayed as a percentage and shows the remaining amount of each sales dollar after all expenses have been paid.  A higher profit ratio means that a firm is more efficient of attaining actual profit from the converted sales (Gibson, 2009).  Philips Company has a profit ratio of 2.36 % and GE 9 %, this means that GE is more efficient at changing its sales into real profit as compared to Philips Company.

Earning Power

It determines how effectively a firm uses its assets to generate income.  The higher the earning power ratio, the more effective a company generates income from its assets. Comparing the two companies, Philips has EP of 11.1% and GE 2.46 %. This means Philips is more effective at generating income from assets compared to GE.

Rate on Investment of Asset (ROA)

It measures how efficiency the management uses company assets to generate profit. Philips and GE have the ROA of 7.48 % and 2 % respectively. This means that Philip is more efficient to generate profit from its asset compared to GE.

Return on Common Equity

ROE is the amount of net income returned as a percentage of shareholders equity. It shows the amount of profit earned by the company in comparison to the total amount of shareholders equity found on the balance sheet (Gitman, & McDaniel, 2009).  ROE of Philips is 17 % and GE 10 % meaning Philips earn more profit in comparison of the total shareholders’ equity compared to GE.

Asset Ratio

It compares the assets of the company to its sales revenue. For instance, how efficiently and effectively a firm is utilizing its assets to generate revenues. High asset turnover ratios show that the company is utilizing its assets at the right way to produce a sale(Albrecht, 2007). The Asset ratios of Philips and GE can be compared by use of inventory turnover, days of receivable outstanding and revenue to assets.

Inventory turnover

It measures in a given period the number of times inventory is sold or used. Inventory turnover is a good indicator of inventory quality, efficient buying practices, and inventory management. From the table above we see Philips Company has inventory turnover of 47.05 and GE 8.44, this means that Philips has inventory quality compared to GE.

Days of Receivable outstanding

Also called the average collecting period measures the number of days a company takes to collect cash from its credit sales during the year (Gibson, 2009). Philips Company and GE have Days of receivable outstanding of 22 and 53 days respectively. This means that Philips is more efficient in the management of debtors, and the company is in better terms of collecting their account receivable as compared to GE.

Formula Philips

Calculation

General

Electric

Calculation

    Ratio

Measure

Philips

Ratio

Value

General

Electric

Ratio Value

I T = Sales

I

=157795

3354

 

= 145715

17257

Inventory turnover  

=47.05

 

= 8.44

DRO= A R

A S

 

= 9630

157795/365

days

 

= 21388

145715/365

days

 

Days of receivables  

=22 days

 

= 53 days

RA  =    S

T A

 

= 157795

49798

 

=145715

656560

Revenue to assets  

=3.17

 

=0.22

 

 

 

 

 

 

 

 

Where I T – Inventory turnover                                   A R – accounts receivables

I – inventory                                                     A S – Average sales per day

D R O- Date of receivable outstanding                 S – sales

R A – revenue to assets                                   T A – total assets

Revenue to Assets

It measures the efficiency of a company’s use of its assets to product sales. The ratio helps to determine well the management is using the assets to promote sales. From the two companies, Philips has 3.17 and GE 0.22 meaning Philips has a better use of its assets compared to GE.  It also indicates the pricing strategy, for instance, GE has high-profit margin because of low asset turnover compared to Philips.

Debt Ratios

It indicates the proportion of the company’s debt to its total assets meaning that it shows the company reliance on debt to finance assets. The higher the debt ratio means the risk is greater associated with the firm’s operation (Gitman, & McDaniel, 2009).  The debt ratios of Philips and GE can be explained more on debt assets and debt to net worth.

 

Formula Philips

Calculation

General

Electric

Calculation

Ratio

Measure

Philips

Ratio

Value

General

Electric

Ratio Value

D A = T D

T A

 

=27406

49798

=519777

656560

Debt to Assets  

= 55%

 

=79.2 %

DNW = T D

N W

 

=27406

22392

 

=519777

136783

Debt to Net Worth  

= 122.4 %

 

=380%

 

Where D A- Debt Asset                                   DNW – Debt to Net Worth

T D – Total Debt                                     T D – Total Debt

T A – Total Assets                                  N W – Net Worth

Workings

Net Worth= Total Assets – Total debt

Philips company net worth=49798- 27406

=22392

G E net worth = 656560 – 519 777

= 136783

Debt Assets

Also referred to debt to asset ratio, is an indicator of the proportion of the company’s asset that is being financed with debt rather than equity. Comparing the two companies’ debt ratio, GE has 0.792 and Philips 0.55 meaning that the two companies asset funding is coming from equity. This shows that they have low financial risk, but comparing the two, Philips has lower financial risk than GE.

Debt to Net Worth

It is used to examine the health of a company, for instance, it measures company’s ability to repay its obligations. Low debt-to-equity ratios are the preferred ones because it protects the interest of lenders and investors in the event of business decline (Gibson, 2009).  GE and Philips Company have debt to net worth of 3.8 and 1.224, meaning that GE may not be able to generate enough cash to satisfy its debt obligation compared to Philips Company.

Security Ratios

Formula Philips

Calculation

General

Electric

Calculation

Ratio

Measure

Philips

Ratio

Value

General

Electric

Ratio Value

E.P.S = N I

No. S

 

=3276

922.07

 

=13057

10289

Earnings per Share  

=$3.55/share

 

=$1.27/share

PE = M.P.S

E.P.S

 

=26.67

1.27

 

=23.75

1.47

Price earnings  

=21 times

 

= 16.2times

B V = O E

No. S

 

=22392

922.07

 

=136783

10289

Book value  

=24.3/share

 

=$13.3/share

Payout= D

N I

 

=737.656

3276

 

=7819.64

13057

Payout  

=22.5 %

 

=59.9 %

Yield=D.P.S

M.P

 

=0.8

26.67

 

=0.76

23.75

Yield  

=3.0 %

 

=3.2%

 

Where E.P.S – earning per share                            B V – book value

No. S – number of sharesO E- owners’ equity

PE – price per earningsM.P.S- market price per share

D.P.S – dividend per share                         M.P- market price

N I – net income                                           D – dividend

Earnings per Share (EPS)

A market prospect ratio measures the amount of net income earned per share stock outstanding at the end of the year. The calculation shows how profitable a company is on a shareholder basis (Gitman, & McDaniel, 2009). Philips has a higher EPS of 3.55/share as compared to GE of 1.27/share meaning that Philips company distributes more profits to customers.

Price Earning

Price earning evaluates the company’s current price per share with comparison to its earnings per share. It shows the market willingness to pay for a stock based on its current earnings. Investors commonly use P/E to evaluate stock’s fair market by predicting future earnings per share.Philips has a high P/E ratio of 21 as compared to GE of 16.2; this means that Philips has a positive future performance as compared to GE.

Book Value

It is a measure of possible indicator of the value of a company’s stock. Book value per share involves comparison of stockholders’ equity to the number of outstanding shares after payment of all debtors and liquidation of assets. GE and Philips Company have book values of $ 13.3 per share and $ 24.3 per share respectively meaning that investing in Philips Company is better since the shareholder gets a high amount if the company were to liquidate compared to GE Company.

Payout Ratio

Dividend payout ratio is the comparison of the dividends paid by a firm to its earnings.  The company does not pay all the dividends; for instance, the dividend not paid out is used for reinvestment and growth in future earnings. Comparing the payout ratio of the two companies, GE and Philips have a payout ratio of 59.9 % and 22.5 %. This means that GE is a mature, stable and large company while Philips Company is seeking growth.

Yield

Yield is the amount paid to shareholders by a company annually for their investments and is expressed as a percentage.  Both companies yield are almost the same meaning that investing in both will be secure because of stable dividend yields.

Conclusion

Comparing the two companies, GE has a good liquidity position to meet its short-term obligations. This means that the company is in a good position to pay their dues at any time during the year. While comparing the profitability ratio, Philip Company has the ability to generate earning relative to sales, equity, and assets as compared to GE. In asset ratio, Philip Company is efficiently utilizing its assets to generate revenues compared to GE. Philip Company has minimal reliance on debt to finance its assets compared to GE. Lastly, on security ratios Philip is better off than GE as seen above.

Financial analysis of the two companies shows that investors will be willing to buy shares and invest more on Philips Company. Philip Company in the long-run is more stable compared to GE.

 

 

 

 

 

 

 

 

 

 

 

References

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Albrecht, W. S. (2007). Accounting, concepts & applications.Mason, Ohio: Thomson/South-Western.

Financial Statements for general electric co (GE).(n.d.). Retrieved November 21, 2014, from http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=GE

Financial Statements for phillips 66 (PSX). (n.d.). Retrieved November 20, 2014, from http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=PSX

General Electric Company: NYSE:GE quotes & news – Google Finance. (n.d.). Retrieved November 21, 2014, from https://www.google.com/finance?q=NYSE:GE&fstype=ii

Gibson, C. H. (2009). Financial reporting & analysis: Using financial accounting information. Mason, OH: South-WesternCengage Learning.

Gitman, L. J., & McDaniel, C. D. (2009). The future of business: The essentials. Mason, OH: South-WesternCenage Learning.

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