General Electric Company (NYSE: GE) is a large conglomerate in the diversified machinery industry, with an April 2016 market cap of $286 billion. Capital structure refers to the means by which a firm funds its operations. Debt is an important part of GE's capital structure, and it contributes more than half of the company's financing, though the company's debt has been declining. The reduction in total debt caused enterprise value to fall over that period, even though market capitalization expanded.
Equity refers to the portion of the capital structure that is sourced from shareholders, and this capital can be attained through the issuance of shares or through profits from business operations. As of December 2015, the book value of GE's total shareholder equity was $100 billion, consisting of redeemable noncontrolling stock of $3 billion, retained earnings of $140 billion, other capital of $37 billion, treasury stock of $64 billion and accumulated other comprehensive loss of $16.5 billion.
GE's 2015 equity value represented a sharp reduction from the $137 billion of both 2014 and 2013. Common stock held in treasury, which are previously outstanding shares that were retired by the company, created the largest reduction in shareholder equity. It was $43 billion in 2013 and 2014, before rising to $64 billion in 2015, following $24 billion of share repurchases that year. GE only repurchased $2 billion in 2014 and $10 billion in 2013. At $140 billion, retained earnings were also relatively low in 2015, after growing from $149 billion in 2013 to $155 billion in 2014. GE reported a net loss of $6 billion in 2015, while paid cash dividends rose from $8 billion in 2013 to $9 billion in 2015.
Non-owners temporarily contribute debt capital to the firm, which is typically repaid with interest over the life of the loan. Debt capital is often exchanged using instruments such as bonds, unsecured notes and term loans. As of December 2015, GE had short-term borrowings of $53 billion and long-term borrowings of $145 billion, bringing total debt to $198 billion. Of the short-term borrowings, $31 billion is attributable to GE Capital, and $61 billion of long-term borrowings is attributable to GE Capital, with senior notes making up $133 billion of long-term debt.
Total debt was $300 billion in 2014 and $330 billion in 2013. Short-term borrowings fell consistently from $78 billion in 2013 to $50 billion in 2015. Nonrecourse borrowings of consolidated securitization entities fell from $30 billion in 2013 to $3 billion 2015, with an additional $4 billion classified as a liability of discontinued operations. Long-term borrowings were $222 billion in 2013, almost $60 billion above the 2015 level. The reduction in GE's debt is largely attributable to the divestitures of GE Capital, which reached $157 billion as of January 2016.
To quantify the influence of debt in capital structure, analysts have developed financial leverage statistics, such as the total-debt-to-capital ratio. This ratio is calculated by dividing the sum of short-term and long-term debt by the sum of total debt and total shareholder equity. As of December 2015, GE's debt-to-capital ratio was 0.66. This marked a slight reduction from 0.69 in 2014 and 0.71 in 2013. Though GE's total debt fell substantially from 2013 to 2015, total shareholder value fell as well, helping to keep the leverage ratio relatively constant.
When comparing companies with dissimilar capital structures, analysts often use enterprise value (EV), because it controls for capitalization by including the market prices of equity and debt in the calculation of firm value. To evaluate mergers and acquisitions, analysts often use EV and compare it to earnings before interest, taxes, depreciation and amortization. As of April 2016, GE's enterprise value was $385 billion. EV trended downward over the three years leading up to that point, falling from $453 billion in April 2013. During that span, EV climbed as high as $491 billion, before falling as low as $361 billion. While GE's market cap did fluctuate, it trended upward, indicating that the falling amount of debt was the primary driver of EV decline.