Profit And Shareholder Wealth Comparison Paper

922 words - 4 pages

Some companies become giants in the business world when classified as conglomerates. According to Investopedia.com (2007), a conglomerate is “a corporation that is made up of a number of different, seemingly unrelated businesses”. Two major companies such as General Electric (GE) and Tyco are classified as conglomerates. Analyzing the market-to-book ratios of the two companies will provide a measure of shareholder wealth. The ratios will also help understand which company has provided greater shareholder wealth creation. The calculation of net profit will help identify which company has done a better job of maximizing profits. From those analyses, the strategy of each company regarding the risk to the shareholder’s investments will be clarified.Today, GE is “11 technology, services and financial businesses with more than 300,000 employees in 160 countries around the world” (General Electric [GE], 2007, para. 2). A few elements need to be analyzed in order to understand the profit and shareholder wealth of GE. Some of those elements are market-to-book ratio and net profit margin. These numbers are calculated by using different formulas. These data are found on the 10 K form that GE has filed with the SEC.Market-to-book ratio= market capitalization/ shareholder’s equityMarket capitalization= total common stock shares* latest stock priceNet profit margin= (Net income/ Revenues)*100At close, on May 17, 2007, GE’s stock price was $ 36.53. (Yahoo Finance.com, 2007)The table below is a table that uses all the data and helps compute the numbers in order to get the final numbers needed. The equity and common stock shares outstanding were obtained from the 10 K form. On order to get the common shareholder’s equity, the preferred stock equity has to be taken away from the equity; however, GE did not have any preferred stock equity.Tyco is a model of sophisticated and innovative manufacturing and service employing 250,000 employees worldwide. Each of Tyco's core businesses holds a leadership position in its specific market.(Tyco , 2007) The same formulas have been used to get the data needed in order to compare GE and Tyco. To make calculations easier, a table with different formulas has been used.TYCO20062005200420032002Equity in $35,419,000,00032,515,000,00030,362,000,00026,419,000,00024,106,000,000Common Stock outstanding1,988,853,4572,013,057,9722,011,601,6151,999,091,2421,997,333,756Net income in $3,713,000,0003,019,000,0002,820,000,000980,000,000-9,180,000,000Revenue in $40,960,000,00039,305,000,00037,960,000,00034,256,000,00034,824,000,000Market Capitalization in $64,100,746,919.11Latest stock price in $32.23Net Profit Margin in %9.0649414067.6809566217.4288724972.860812704-26.36113025Market to book1.80978421Now that the numbers have been computed and market-to-book ratio has been identified, let us take a look at which of the two companies has provided greater shareholder wealth creation. According to...

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