Ratio analysis is one way that a company's financial activities can be measured and analyzed. Potential investors and security analysts, for example, would probably be most interested in a company's profitability, followed by liquidity and debt utilization. Bankers or trade creditors would focus more on the firm's ability to meet current debt obligations as they become due. Bondholders and such may be mostly focused on the ratio of debt to total assets, but may also look at the company's profitability as well (Block, 2005). Below, we will compare a couple different ratios for the major corporations General Electric and Tyco.
Market-to-Book Ratios
When looking at the financial reports for General Electric (GE), one can see that this company currently has 9.97 billion shares of common stock outstanding. The price per share as of 12:05 EST on August 4, 2008 is $28.13 per share. This gives GE a market capitalization figure of $280.38 billion. When divided by GE's common shareholders' equity of $115,559 million, the market-to-book ratio is 2.43.
When looking at the financial reports for Tyco, one can see that this company currently has 1,478,970 shares of common stock outstanding. The price per share as of 12:05 EST on August 4, 2008 is $43.89 per share. This gives Tyco a market capitalization figure of $64,911,933. When divided by the company's common shareholders' equity of $15,624 million, the market-to-book ratio calculated is 0.004.
Based on these market-to-book ratios, General Electric's strategy has provided greater shareholder wealth creation. GE's ratio is much higher than that of Tyco, which shows that GE has greater sharehold ...