GE (GE ) relies heavily on acquisitions--financed with stock and short-term debt--for its growth. The strategy leaves it vulnerable to volatile markets and shifts in investor confidence--and makes for lower quality of earnings than if growth came from innovation and improved productivity.

GE'S RESPONSE: Only 15% of earnings growth came from acquisitions last year, while most came from core businesses. It rarely uses stock, and commercial paper is only used as interim financing.


GE's $103 billion in outstanding commercial paper is nearly three times what its bank lines cover. Relying too much on short-term IOUs is cheap but leaves GE subject to interest-rate swings.

GE'S RESPONSE: The excess short-term debt stemmed from bond market turmoil post-September 11. The company is now increasing bank lines and trimming its share of commercial paper. It also has other sources of liquidity.


GE Capital uses "near-hedge-fund leverage" to help generate returns. Without the benefit of that leverage, the company's growth rates would be in line with "a failed conglomerate of yesteryear."

GE'S RESPONSE: GE Capital's leverage has been consistent for years and is appropriate for a finance company. Moreover, it has the support of rating agencies. The industrial side of GE has a tiny $2.5 billion in debt.


GE still doesn't disclose enough to judge whether earnings are high-quality

and sustainable, and management is unresponsive. Gross wants the performance of individual units, and the impact of acquisitions, broken out better.

GE'S RESPONSE: Gross himself has called GE one of the highest-quality companies in the world. GE has improved disclosure under Immelt and continues to do so. It's constantly in touch with investors and creditors.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE