Financial Condition of General Electric and Tyco The present paper analyzes the financial condition of two companies, General Electric and Tyco. General Electric Corporation and Tyco international are global conglomerates, the companies that have many diversified business line. Unlike Tyco, General Electric utilizes a conservative growth strategy, and has the business aim to become the number one, or at least number two in each business industry where the company competes. In its turn, Tyco International utilizes aggressive sales and earnings growth strategy by means of multiple and rapid acquisitions. As these two companies pursue different strategies, it will be very interesting to find out which companys strategy has provided greater shareholder wealth creation, which company has done a better job of maximizing profits, and which companys strategy has presented greater risk to the shareholders investment and why. So, in order to answer these questions, it is necessary to find the financial data for each company, namely, common shareholders equity (total equity less any preferred stock equity), market capitalization (total common stock shares outstanding times latest stock price), and net profits for each company for the past five years.
Table 1 – $s in billion(s) General Electric and Tyco International General Electric Tyco International Total Assets (2007) in million dollars $ 795,400.00 $ 32,815.00 Total Liabilities (2007) in million dollars $ 679,800.00 $ 17,191.00 Common Shareholders Equity (in millions) $ 115,600.00 $ 15,624.00 Outstanding shares $10.05B 10,050,000,000 $484.96M Last trade (in dollars) $33.84 $40.10 Market Capitalization $340.02B $19.45B net profit Margins Dec (2005) 12.2% 8.1% Net Profit Margins Dec (2004) 12.1% 7.7% Net Profit Margins Dec (2003) 12.2% 2.6% Net Profit Margins Dec (2002) 11.5% 8.2% Net Profit Margins Dec (2001) 11.2% 11.5% Average Net Profit Margin (5 years average) 12.66% 2.12% Market to book ratio (P/B Ratio (Price/Equity)) 3.6 1.35 Net Income (2007) in millions (USD) $22,208.00 -$1,742.00 Return on Equity 19.79% -9.88% Shareholders’ Equity is the difference between the companys total assets and total liabilities.
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This value represents the shareholders ownership of the company. Lets calculate shareholders’ equity for each company. According to Google Finance (http://finance.google.com/finance?q=NYSE:GE), shareholders’ equity in millions for General Electric will be as follows: $795,400.00 – $679,800.00 = $115,600.00. According to Google Finance (http://finance.google.com/finance?q=NYSE:TYC), shareholders’ equity in millions for Tyco International will be as follows: $ 32,815.00 – $ 17,191.00 = $ 15,624.00. First, as far as Market Cap is the aggregate market value of the issued and outstanding shares of a company, in order to calculate Market Cap value for each company, we need to multiply number of issued and outstanding shares times current share price, where shares outstanding value implies shares of common stock that are currently owned by investors. For General Electric (http://finance.yahoo.com/q/ks?s=GE) the value will be $340.02B ($10.05B * $33.84 = $340.02B).
For Tyco International (http://finance.yahoo.com/q/ks?s=TYC) Market Capitalization will be $19.45B ($484.96M * $40.10 = $19.45B).
According to http://stocks.us.reuters.com/stocks/ratios.asp?rpc =66&symbol=GE, Net Profit Margin – 5 years average for General Electric is 12.66. What concerns net income, net income for General Electric (annual 2007) is $22,208.00, while Tyco Internationals net income in 2007 was -$1,742.00 (http://finance.google.com/finance?q=NYSE:TYC) For General Electric, Return on Equity (2007) was 19.79%, while Tyco Internationals Return on Equity (2007) was -9.88%. Now, market-to-book or price-to-book ratio (P/B ratio) = price per share / book value per share, where book value per share = total owner’s equity / number of shares outstanding. For General Electric it will be 3.6 (http://finapps.forbes.com/finapps/jsp/finance/com pinfo/Ratios.jsp?tkr=GE), while for Tyco International P/B ratio will be 1.35 (http://finapps.forbes.com/finapps/jsp/finance/com pinfo/Ratios.jsp?tkr=TYC).
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Taking into consideration all the information we were able to obtain, we can come to conclusion that General Electric strategy has provided their shareholders with significantly greater shareholder wealth creation, if compared to Tyco International. Based on the average net profit margins, we can come to conclusion that General Electric has also done much better job of maximizing profits, while Tyco International’s financials are much worse. Finally, it is possible to assume that, taking into account all financial data obtained, Tyco International’s strategy has presented significantly greater risk to the shareholders’ investments, as the company is currently in its transition period, because it undertakes efforts to sell off some underperformers to improve its financial results, and, at the same time, the company tries to streamline its business.
However, due to global financial crisis the company failed to maximize its profits and to provide its shareholders with greater shareholder wealth creation if compared to General Electric. References Forbes – Tyco International. (n.d.).
Retrieved February 11, 2008, from http://finapps.forbes.com/finapps/jsp/finance/comp info/Ratios.jsp?tkr=TYC General Electric. (n.d.).
Retrieved February 11, 2008, from http://finance.google.com/finance?q=NYSE:GE General Electric – Key Statistics. (n.d.).
Retrieved February 11, 2008, from http://finance.yahoo.com/q/ks?s=GE Reuters – GE. (n.d.).
Retrieved February 11, 2008, from http://stocks.us.reuters.com/stocks/ratios.asp?rpc =66&symbol=GE Tyco International – Financials. (n.d.).
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Retrieved February 11, 2008, from http://finance.google.com/finance?q=NYSE:TYC Tyco International – Key Statistics.
Retrieved February 11, 2008, from http://finance.yahoo.com/q/ks?s=TYC.