Where is GE Stock Headed? A Look Through Financial Ratios

Their is a lot of speculation in the market about where the General Electric (NYSE:GE) stock is headed. With no clear consensus emerging, we thought looking at the hallowed ratios which the investors have been using for years might yield an answer. So, here is a look at three of the widely used ratios for GE and our expectations for each of them in the future.GE competes with other industrial conglomerates like United Technologies Corporation (NYSE:UTX), 3M (NYSE:MMM) and Johnson and Johnson (NYSE:JNJ).

See our full analysis of the General Electric stock here

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Price/Earnings Ratio

GE currently trades at a P/E ratio of 14.1 which is very close to S&P 500’s average of 14.2 . This is, however, lower than the 15.6 average of industrial sector in general, of which GE is a part. Before the sub prime crisis of 2008, the company had started commanding earnings multiple of financial companies as GE Capital was then contributing a very substantial chunk of the earnings. After the crisis though, the company has decided to shift the focus back to its core sector and has started commanding a more conservative P/E.

We feel with the resurgence in U.S. economy and the growth in emerging markets, GE has a lot of potential to command a much higher earnings multiple than most of its competitors. Therefore, if the investor sentiments turn bullish, GE’s stock should benefit more than that of its competitors.

Price/Book Ratio

The GE stock is currently trading at a price/book ratio of 1.6 which is less than that of the industry which commands 2.4 and S&P’s 500 which commands 2.1 . This is also favorable for GE as the interest rates in U.S. are expected to remain abnormally low till 2014. Thus the company’ spread between the rate of return on equity and the interest rate will increase, resulting in the stock commanding a higher premium over its book value.

Price/Cash Flow Ratio

The company commands a price/cash flow ratio of 5.9 which is much lower than industry’s 10.0 and S&P 500’s 8.7 . GE’s average for the past five years has stayed at 5.9. This shows the company’s strong cash flows and raises a question of whether the company is doing enough to plow the cash back into the business for growth. We feel that the company will continue its conservative policies and this ratio should hover around 6 for the foreseeable future.

Therefore, considering these ratios, we feel that the stock will see better days ahead.

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