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Subject:  Re: GE RM Analysis FY 00 Date:  6/21/2001  10:58 PM
Author:  GrandpaRalph Number:  8041 of 8329

Hi Tollkuehn,

"I did a ranker on GE, and my numbers track with yours except for COGS. You've got 39k and 35k, while I came up with 111k and 96k"

Your $111K is the sum of ALL costs and expenses, including things in the 10K called "insurance losses...", "Other costs and expenses", etc. Conceptually, the only costs that should be considered when computing gross margins are the costs directly attributable to providing the product. Thus it would include the material and direct labor of a manufactured product, but NOT the salary of the plant manager's secretary, or the cost of the tooling on the production line. (For example).

In the case of services, it would again include the costs directly attributable to providing the service. For instance if you own a janitorial service, it would be the cost of the cleaning supplies and the wages of the floor sweeper. It would NOT include the cost of the person in the office who schedules the work or orders more soap. Those costs eventually get reflected in Net Margin.

Since GE provides both Goods and Sevices, you need to consider both Cost of Goods and Cost of Services when computing Gross Margin, so the number for FY 2000 is arrived at as follows:

GE Cost of Goods 30,782
GE Cost of Service 12,765
GECS Cost of Goods 8,537

There is one other left curve, in that GECS has financing operations in which interest is a direct cost of service, as I understand it. (I confess I'm walking on thin ice here... I don't like analyzing financial institutions.)

GECS Interest and other financial charges = 11,111.

So finally, direct costs = 52,084 + 11,111 = 63,195.

So, Gross Margin = (Revenue-Cost of Revenue)/Revenue
or (129,417-63,195)/129,417=51.1%

I hate analyzing conglomerates, because they frequently are the summation of many smaller, very different businesses where things like Margins, growth rates, etc, are just "averages" of the many businesses under the umbrella. To double check my work, I sometimes use Market Guide. This page shows slightly different numbers for both revenue and cost of revenue, but they are in the same ballpark:

This page computes margins and ratios, and again is reasonably close:
(You will have to scroll down a ways to about half way down to see Gross Margin listed as 50.92%)

If someone has an explanation for the difference in numbers between Market Guide and the SEC filing, I'd like to hear it. They are usually pretty accurate.


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