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GE Cash Plunge Poses Risks for Creditors, Investors

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General Electric, an industrial conglomerate based in Boston, has seen its operating cash flow plunge into negative figures in 2018.

Significant drops in operating cash flow and market capitalization raise major red flags for the creditworthiness of General Electric.

In October 2010, Clarient, Inc., a California-based oncology diagnostics company, was losing money, booking revenue that was uncollectible and its auditor, KPMG, had issued a warning about the company's ability to continue as a going concern.  Just when Clarient's owners and lenders were heading for the exits one company decided to swoop in and buy the troubled firm for $587 million--over three times its market value.  That company was General Electric.

Acquisitions that defied market logic, huge investment forays into unprofitable ventures such as green energy and management's willful neglect of the traditional business practices that made the former symbol of U.S. manufacturing successful in the first place have finally taken its toll as GE itself is now engaged in a struggle to remain a going concern.  In 2015, GE dumped Clarient for a loss of $287 million.

General Electric, the once venerable American industrial giant, is now experiencing a monumental cash shortage that could pose serious risks to vendors.  GE's operating cash flow plummetted in the first nine months of this year to minus $4.13 billion, according to the company's quarterly statement that was filed yesterday.  GE's operating cash flow has fallen 137 percent since the beginning of last year and that was on top of a 63 percent drop from the 2016 level of $30 billion (see nearby chart).

The seismic drop in cash flow over the past three years is an alarming sign for the overall health of the conglomerate because of the importance of operating cash flow in determining the viability and creditworthiness of a company.  Companies that struggle to generate operating cash must rely on alternative sources of funding to keep the doors open such as loans and equity capital, if available.

Over the years, GE has been notorius for hoarding its own cash by forcing vendors to accept payment terms that reached as long as 90 days, well beyond the standard net-30 day arrangement observed by most companies.  GE got away with this by leveraging its size and stability as one of the few non-financial companies with a AAA rating, but that argument will be difficult to make with the company's current struggles.

Earlier in the month, S&P Global Ratings downgraded GE's credit rating by two notches to BBB-plus, which puts the struggling giant just three notches above junk.  Moody's Investors Service and Fitch Ratings warned that they too were preparing a downgrade, according to report in the Wall Street Journal. 

Both revenue and profits have suffered in the past two years.  In 2017, GE reported annual revenue of $108 billion on the manufacturing side, a five percent reduction from the $113.67 billion mark reached in 2016.  But GE lost $6.5 billion last year compared with a 6.9 percent profit the previous year.  GE is comprised of a manufacturing segment and a financial services segment known as GE Capital.

Publicly, General Electric is trying to put at ease the few investors it has left. "GE has a sound liquidity position, including cash and operating credit lines," a spokeswoman said, according to the Wall Street Journal.  "We remain committed to strenghening the balance sheet."

But GE's liquidity was already weak at the end of 2017 with current liabilities exceeding current assets for a current ratio of 0.74.  Current ratio is a basic measure of liquidity.  In 2016, the company's current ratio was worse at 0.59 but cash flow as a percent of revenue was much better that year at 26.3 percent.

The company's worsening cash flow is significant because of the company's rapidly declining market value.  At the close of business yesterday, GE's stock price fell 8.8% to close at 10.18.  The company's total market capitalization has slid well below annual revenue to a level of $88.48 billion yesterday compared with a $173.6 billion at the same time in 2017, a 68 percent decline in market value in one year.

Also, GE announced yesterday that it was slashing its once-reliable dividend for the second time in a year to a penny a share down from the meager 12 cents per share that was established last year.  Dividend payments are important for large companies such as GE in attracting investors because they don't have the growth potential of smaller, faster moving companies.

In addition to the dividend cut, GE announced that the FBI was opening a criminal probe into possible accounting irregularities on top of the investigation currently being conducted by SEC.