Liquidity Ratios
University of Phoenix
Fin-370
Caleb D. González, José Edwin Ortiz,
Luis Maymi, José Berrios
Prof. Emanuel Santiago Pérez abril 27, 2015Financial Liquidity Analysis
General Electric is a powerful electrical distributor that supplies residential, industrial and commercial sectors. General Electric has been in business for over 125 years with a motto that reflects why they have been so successful for so long. Beginning with their incandescent lamp and evolving their product offering to provide consumers with transportation, power transmissions and medical equipment. Today GE grosses over 150,000,000 million dollars in revenues and employs a total of 287,000 employees worldwide despite the economic uncertainty the world has been facing. Our group has been placed to the task to run liquidity on GE to diagnose how profitable it would be for investors to engage the company with their financial support. We will also make a comparison to one of General Electric’s closest competitor, Siemens. Siemens, like G.E, penetrated the healthcare market, energy, transportation and lighting industry. Today, they gross over 100,000,000 million dollars which might seem 50,000,000 dollars less when compared to General Electric but numbers don’t lie and while a company might report a certain amount, the amount is in no way indicative of their financial health, or liquidity.
The first test our group ran in order to explore liquidity was the Current Assets Ratio (Current Assets divided by Current Liabilities) analysis. Current Assets are very important for a company because they represent a company’s ability to pay debts, fund day-to-day operations and pay ongoing expenses. These Assets can be represented in crude oil, currency and other valuables. The Current Ratio is calculated by dividing current assets with current liabilities.

Current Assets Ratio Analisis

2010
2009
2008
GE
0.72
0.77
0.39
Siemens
1.22
1.2
1.02

When Checking Liquidity we can see in this chart that G.E has less current assets than Siemens. Despite the challenging economy, Siemens has more hold of their current assets when compared with G.E which could be an indicator that Siemens is more able when it comes to meeting their obligations. But current Assets are not enough when building a financial radiography of a company. There exist the Acid Ratio Analisis( Current Assets minus Inventory, divided by Current Liabilities) which is more rigid when measuring a company’s ability to pay off debtors. It eliminates inventory and prepaid expenses. This test must be performed with caution as unregistered liabilities may produce a false sense of security. When comparing G.E’s ability to pay off debt (excluding inventories and prepaid expenses) This is what the acidity ratio shows.
G.E Versus Siemens Acidity Ratio Comparison

G.E Versus Siemens Acidity Ratio Table

2010
2009
2008
G.E
0.67
0.71
0.71
Siemens
0.85
0.81
0.66

When analyzing GE’s acidity we see that their ability to meet their obligations has been reduced with the economical environment, while Siemens has increased their ratio throughout the last three years. If we could make an assumption from this table, it would be that Siemens has more ability to pay-off their liabilities than G.E, but taking into account their revenues, it would be interesting to identify a trend if Siemens revenues were 50,000,000 dollars more. Despite these findings, Acidity and Current Ratio are not enough to determine their overall financial health.
Debt may reflect how compromised a company’s financial power may be. But it may also reflect a company’s attempt to stay competitive by lowering GP to comply with the demands prices. When one divides a company’s Debt by Net Worth you get the company’s debt ratio (Total Debt Divided by Total Assets). Measuring how a company leverages its debt against employed capital is achieved by performing a debt ratio analysis.
Debt Ratio Analysis

Debt Ratio Analysis
Debt

2010
2009