What Investors Should Know About General Electric Company's (NYSE:GE) Financial Strength

Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as General Electric Company (NYSE:GE) a safer option. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the key to extending previous success is in the health of the company’s financials. Let’s take a look at General Electric’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into GE here. See our latest analysis for General Electric

How much cash does GE generate through its operations?

Over the past year, GE has maintained its debt levels at around US$134.59b made up of current and long term debt. At this stable level of debt, GE's cash and short-term investments stands at US$18.21b for investing into the business. Additionally, GE has produced cash from operations of US$10.43b in the last twelve months, leading to an operating cash to total debt ratio of 7.75%, meaning that GE’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making businesses since metrics such as return on asset (ROA) requires positive earnings. In GE’s case, it is able to generate 0.077x cash from its debt capital.

Does GE’s liquid assets cover its short-term commitments?

Looking at GE’s most recent US$61.89b liabilities, the company has been able to meet these commitments with a current assets level of US$140.11b, leading to a 2.26x current account ratio. Generally, for Industrials companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can GE service its debt comfortably?

Considering General Electric’s total debt outweighs its equity, the company is deemed highly levered. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. But since GE is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

GE’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for GE's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research General Electric to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for GE’s future growth? Take a look at our free research report of analyst consensus for GE’s outlook.
2. Valuation: What is GE worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether GE is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.