Alternative Analysis of GE Capital - Case Study Example

Executive Summary GE Capital is considered to be a global market powerhouse. The total assets of the company are thought to comprise the fourth largest source of finance in Canada. It works with a combination of individuals and commercial entities. It also comprises insurance and renting companies all over the world. Transportation finance had an expectation of improved business conditions (Norton, Diamond and Pagach 245). This expectation was, however, prone to getting the effects of external and internal aspects on their profit margin. This involved the rise in the price of diesel, a shortage of drivers and an effort to maintain their depreciating fleets. Problem Statement The biggest challenge included debts from credit cards, commercial mortgages and machine financing. Exchange of money for a new issue of preferred stock and warrants was the beginning of GE Capital. This led to deterioration of the company at a remarkably fast rate. This deterioration, in turn, led to a fall in price of credit default swaps, lenders’ insurance and actual bonds of the company (Norton, Diamond and Pagach 245). Sales of common stock does not always imply a success in the financial position. Other Issues In debt and borrowing, it is of importance that GE Capital embraces its position with the AAA ratings. This rating is of the essence as it helps generate 40% of its revenue from the units. GE experienced a fall in earning up to below 110% of the fixed charges of the unit. This is defined as interest expense with an additional portion of rental costs. To gain financial stability, GE Capital needed to take the ratio back to 110%. A rise in the debt ratio above 8 to 1 would require the parent company to add more funds. Revenue was fixed at 170% at year end for GE Capital. This, however, was not matched by the equity to debt ratio as it was above 7.3 to 1 on the high end that was the case for various companies. Moreover, there is a greater share of more than $43 billion in loans that were securitized. Another problem was recruiting and employing quality drivers and raising finance for its operations. Other widespread concerns were the increasing expense on diesel fuel and machine parts and maintenance. There were also other concerns regarding the costs of operation related to complying with government regulations. Analysis Liquidity Current ratio Industry 2002 2001 2000 =1.1:1 2.3:1 2.8:1 3.4:1 Acid Test Ratio Industry 2002 2001 2000 =0.9:1 1.7:1 1.9:1 2.2:1 Working Capital Industry 2002 2001 2000 N/A 34,421 28,252 33,062 Profitability Return on Equity Industry 2002 2001 2000 30.2% 52.6% 13.0% 0.0% Stability Industry 2002 2001 2000 Debt/Equity 1.56:1 2.2:1 4.2:1 0.23:1 Interest Coverage N/A 5.5* 1.7* 1.0* Industry 2002 2001 2000 Age of Receivables 42.6 days 18days 16days 40days Age of Payables N/A 19days 14days 34days The liquidity ratio indicates that GE Capital has the ability to meet its financial needs. It is higher than the industry ratio. However, there is a decline in the ratios every year from 2000. There is no consistency in the levels of working capital throughout the three years. In 2002 working capital is greatest an indication that GE is doing well. Profitability of the company has been on the rise throughout the three years. It is higher than the industry level implying acceptable profitability. Stability of the company is higher than the industries as well as the repayment periods. This shows that the GE Capital is at a favorable financial position. Statement of Changes Sources: Other Receivable 53 Prepaid Expenses 1,172 Loan (New court) 13,631 Loan ( GE Capital) 189,000 Retained 56,999 Uses: (20,092) Net Cash Increase 300,732 Cash 31st Dec 2000 (3,877) Cash 31st Dec 2002 8107 The net cash increased by 300,732 and there was also an increase in cash in 2002 to 8107.It indicates the ability of GE Capital to meet its short term financial responsibility. It shows that the company has a remarkable liquidity. The Four C’s of Credit Character refers to the credibility of a business based on its past financial status. The past debt repayment schedule shows the credit worthiness of a company. Capacity represents the ability of the company to honor its financial obligations when they fall due. It involves examining if a business is making returns that can sustain daily operations and repayment of debt. Capital is the resources of the business especially the capital assets. These assets should be of fundamental value and highly liquidated. Banks view cash as the preferred asset. Collateral is the assets against which a loan is pledged. For a company to secure credit from a bank, it needs to have enough assets so that failure to repay the loan, the debt can be recovered. Considering these aspects of credit, GE Capital credit worthiness is wanting. This is because it is not making consistent profits and has even incurred losses. The company is also highly dependent on debts. Banks often give credit to those who are not in so much need. Considering this, the company might have future difficulties in acquiring credit. Balance Sheet $ 2002 $ 2001 $ 2000 Assets Current Assets 4230 2605 8107 Cash 42004 28230 21912 Accounts Receivables 429 478 482 Other Receivables 15065 12820 16237 Prepaid Expenses 61728 44133 46738 Total Current Assets Fixed Assets Trucks and Trailers 463800 426500 95000 Fixtures 5480 5480 5480 Company Vehicle 21500 21500 21500 Computer 3200 3200 - Fixed Assets 186556 143761 95196 Total Assets 307424 312919 261784 Liabilities Current Liabilities Accounts Payable 27307 15881 13676 Bank line of credit - - - Total Current Liabilities 27307 15881 13676 Loan (New court credit) 189000 273000 - Loan GE Capital 36000 - - Total Liabilities 225000 273000 - Owner’s Equity 252307 288881 13676 Share Capital 60000 60000 60000 Retained Earnings 56845 8171 (154) Total Owners Equity 116845 68171 59846 Liabilities and Owner’s Equity 369152 357052 73528 Alternative Analysis GE Capital comprises distinct corporate traits that the main debt measuring agencies evaluate. This is done both quantitatively and qualitatively. The quantitative rating includes both earning and profitability (Norton, Diamond and Pagach 215). It also includes such aspects as income growth, the wideness of revenue and the diversity of the sources of revenue. In some cases, it also includes the return on assets of the company. The quality of the asset is included and covers items such as delinquency and write off ratios. The reserve coverage is at times considered as an asset quality. There are financing and liquidity that involve all the funds utilized in the activities of the company. This includes funds that are generated from the operating activities. It also involves the leverage ratios such as accessibility to markets, debt to ratio and liquidity backup from financial institutions. These institutions may include banks and other sources of finance. There is also a need for adequate capital, which should be sufficient for both required capital and leverage ratios that are considered tangible. Qualitative rating involves various aspects. It includes the franchise strength that covers competitive advantage, and positions in the market and the prevailing conditions. Management strength is crucial where experience in strategic thinking and corporate governance is required. Clarity in financial reports is also necessary in enhancing the quality, completeness and the transparency of all financial operations. Recommendation A target should be set for not more than 35% of outstanding debts. The alternative sources of liquidity would be sufficient to allow a transaction that is in order. This would be in the unlikely occurrence of impaired access to markets. The sources of finance would, however, depend on the nature of a hypothetical event. There are other sources of liquidity that may be short or long term funding. This would be in case where contractual lending commitment is not applicable. It would also include monetization and asset securitization. These are considered as secured financing for worldwide assets and sale of other assets. Work Cited Norton, Curtis L., Michael A. Diamond, and Donald P. Pagach. Intermediate Accounting: Financial Reporting and Analysis. Boston: Houghton Mifflin Co., 2006. Print. Read More