Wealth Comparison Financial Analysis
Profit and Shareholder Wealth Comparison To compare two competing companies in a certain industry many financial ratios can be used in order to determine which stock is a better buy or if the company being looked at is performing better than the peers. This paper will compare GE and Tyco to determine which one has been performing at a higher level than the other. To value these companies certain data must first be provided, the first one is common stockholders equity. For GE the total is $112,314,000 and for Tyco the total is $15,624,000. Next the market capitalization for each firm will be provided. Since Tyco has 49,284,000 shares outstanding and a market price 34.07, as of 1/18/2008, the market capitalization is 16.86 billion.
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Now the paper will look at other factors to determine if the risk GE took for maximizing wealth was too much to justify those higher margins. The first place to start would be the debt to assets ratio. This will analyze the amount of a companies debt in relation to the assets owned. Since each industry has different standards this ratio is best used to compare companies in the same type of business. Some companies with a higher turnover of inventory can justify a high percentage while other industries cannot. This will affect a number of factors but the most important one is the ability to raise money. A company whose debt is too high will not be able to raise other money, or if they were able to, they would have to give a high interest rate in order to entice investors to take the extra risk. Looking at the 2006 financial statements the data shows that GE has total liabilities of 577.34 billion and assets of 697.24 billion that give a debt to assets ratio of 82.8%. Tyco, for the same period, has assets of 63.72 billion and liabilities of 28.25 billion giving a ratio of 44.3%. So even though GE had higher performance for the year management had to take on more risk to achieve those numbers. An investor will have to make the decision as to if the increased risk is worth the higher shareholder
Now the paper will look at other factors to determine if the risk GE took for maximizing wealth was too much to justify those higher margins. The first place to start would be the debt to assets ratio. This will analyze the amount of a companies debt in relation to the assets owned. Since each industry has different standards this ratio is best used to compare companies in the same type of business. Some companies with a higher turnover of inventory can justify a high percentage while other industries cannot. This will affect a number of factors but the most important one is the ability to raise money. A company whose debt is too high will not be able to raise other money, or if they were able to, they would have to give a high interest rate in order to entice investors to take the extra risk. Looking at the 2006 financial statements the data shows that GE has total liabilities of 577.34 billion and assets of 697.24 billion that give a debt to assets ratio of 82.8%. Tyco, for the same period, has assets of 63.72 billion and liabilities of 28.25 billion giving a ratio of 44.3%. So even though GE had higher performance for the year management had to take on more risk to achieve those numbers. An investor will have to make the decision as to if the increased risk is worth the higher shareholder