Is General Electric (NYSE:GE) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that General Electric Company (NYSE:GE) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for General Electric

What Is General Electric's Debt?

You can click the graphic below for the historical numbers, but it shows that General Electric had US$70.6b of debt in March 2021, down from US$85.2b, one year before. However, because it has a cash reserve of US$26.6b, its net debt is less, at about US$44.0b.

How Strong Is General Electric's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that General Electric had liabilities of US$57.7b due within 12 months and liabilities of US$152.3b due beyond that. On the other hand, it had cash of US$26.6b and US$21.2b worth of receivables due within a year. So its liabilities total US$162.2b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's massive market capitalization of US$122.1b, we think shareholders really should watch General Electric's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if General Electric can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, General Electric made a loss at the EBIT level, and saw its revenue drop to US$77b, which is a fall of 16%. We would much prefer see growth.

Caveat Emptor

While General Electric's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at US$225m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through US$1.3b in negative free cash flow over the last year. That means it's on the risky side of things. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how General Electric's profit, revenue, and operating cashflow have changed over the last few years.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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