Debt profile and liquidity
As you look at the graph below, you may be wondering why there’s been a sudden increase in General Electric’s (GE) industrial plus verticals debt-to-equity. Verticals refer to financial services (XLF) businesses expected to be retained by GE and primarily includes GECC’s (General Electric Capital Corporation) vendor financing operations.
As of September 30, 2015, GE’s industrial plus verticals had a much cleaner balance sheet than consolidated GE in 3Q15. The segment had $20.7 billion in debt against equity of $111.7 billion. This implies a debt-to-equity ratio of less than 0.2x. The consolidated debt-to-equity was ~2.5x.
But in 4Q15, the industrial plus vertical segment had $103.7 billion in debt against equity of $98.3 billion. This implies a debt-to-equity ratio of ~1.1x, a sudden jump from 3Q15. Consolidated debt-to-equity marginally declined to 2.0x.
The key reason for the sudden rise in the leverage factor in industrial plus verticals is due to the assumption of an $85.1 billion debt by the segment from GECC. On the asset side, the amount is reported as receivables from GECC.
GE had $10.5 billion in cash and cash equivalents on the industrial plus verticals balance sheet as of December 31, 2015. The sale of GECC’s assets may improve the liquidity position further. Based on company guidance, GE expects to generate cash from operations of about $30–$32 billion in fiscal 2016, subject to an $18 billion dividend from GECC.
GE is part of the Industrial Select Sector SPDR ETF (XLI) and accounts for 11.8% of the total holdings. Investors in this ETF may benefit if GE achieves desired results from the sale of GECC’s assets.