Profit and Shareholder Wealth Comparison

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. GE has a price of 34.31 with 10.11 billion shares outstanding 346.87 billion in market capitalization.

When determining a value for a company a market-to-book ratio is used. This ratio is calculated by dividing the company’s market capitalization by that company’s shareholders’ equity. In the case of GE the ratio would be 3088 found by (346,870,000,000 / 112,314,000). For Tyco the ratio would be 1079, (16,860,000,000/ 112,314,000.) This shows that GE has generated more shareholder wealth than Tyco for that period.

Another piece of information that will be needed is the profit margin, this can be found by dividing net income by total sales revenue. This information can be found on the statement of cash flows and for this paper the last five years from 2002-2006 will be examined. Starting with 2006 GE had 12.74% (20,829 / 163,391), then 11.12% (16,711/ 150,242), 11% (16,819 / 152,866), 11.31% (15,236 / 134,641), and 10.71% (14,167 / 132,226) of profit margins. Tyco had profit margins for the same period of 20.71% (3,590/ 17,336, 18.57% (3,094/ 16,665), 7.17%(2,879 / 40,153), 2.73% (980 / 35,897), and -26.36% (-9,180 / 34,824.) To find the average net profit margin they will all be added and divided by five which shows that GE has done a better job at maximizing profits since they average is 11.76% compared to Tyco’s of 4.56%.

Clearly by looking at the net profit margins and market to book rations GE has done a better job at maximizing shareholder wealth and increasing profits. 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