Acquired by GE in 2017, Baker Hughes was a global supplier of oilfield products and services, such as drill bits and drilling systems, tools for well logging, drilling fluids, electric submersible pumps, and upstream chemicals.
A company creates wealth for its long-term shareholders in 2 main ways - through dividend payments and through the accumulation of retained earnings. This graph shows the accumulation of per-share equity of long-term shareholders (green bars), which consists of the retained earnings plus all capital invested in the company, and the cumulative dividends the company has paid over time per share of its stock (blue bars).
In the words of Warren Buffett: "We're looking for... businesses earning good returns on equity while employing little or no debt."
Return on equity is a key metric of financial performance, indicating a company's ability to generate earnings using shareholder capital. Over time, ROE is one of the major determinants of the rate at which a company creates shareholder wealth. The average ROE for large U.S. companies is 12%, and many investors use it as a threshold for attractive investments.
Companies can boost ROE by increasing leverage, which reduces the safety of the investment. Therefore, it is useful to look at the return on assets (ROA), which measures a company's earning power regardless of its capital structure. A widening gap between ROE and ROA may be a warning sign that should be thoroughly investigated.
Earnings per share is a popular metric used to value a company (using P/E ratio); growth in EPS is often used to judge company growth potential. However, many investors believe that EPS is an inferior metric to ROE, because it ignores the amount of capital the company used to generate earnings.
Free cash flow shows how much cash a company generates from operations, above and beyond what is required to maintain or expand its productive assets. This cash can be returned to investors, or spent by management on growing the company or paying back its debts.
Balance sheets of many companies contain intangible assets such as goodwill, trademarks, patents, etc. Many investors consider intangibles more difficult to value than physical assets. If intangible assets had been valued incorrectly, they must be impaired, resulting in a loss charged against shareholder equity. This chart demonstrates the potential loss to shareholder equity from such impairments.
Companies often use debt financing to increase their return on equity. However, as the amount of debt financing increases relative to the amount of equity financing, the company becomes more sensitive to down turns and other negative events. As a result, many investors use the ratio of debt to equity as a measure of a company's financial risk, and avoid companies that have this ratio above 1.
This chart shows shareholder equity as a percentage of total assets, allowing investors to judge the overall leverage. Companies with a higher proportion of equity can be viewed as safer investments. This metric is particularly important for highly leveraged institutions, such as banks, where it must be at least 4% according to government regulations.
The ratio of current assets to current liabilities is known as the current ratio. This metric is a quick measure of the company's ability to pay its short-term obligations. A current ratio below 1 is a warning sign that should be investigated, especially for companies that cannot count on adequate cash flow from operations.
This chart shows the cumulative dilution of investor ownership in a company over time. Dilution reduces an investor's participation in the future earnings. Dilution increases when a company issues new shares, and decreases when a company buys its shares back. Many investors avoid companies with large chronic dilution.
analysis provides insight into factors affecting the Return On Equity of a company.
The DuPont equation decomposes ROE as follows:
ROE = (Net margin) * (Asset turnover) * (Asset to equity ratio)
Net margin indicates operating efficiency, Asset turnover measures the total asset use efficiency, and the Asset to equity ratio is a measure of financial leverage.
The dividend payout ratio tells investors what percentage of earnings a company returns to shareholders, and what percentage it retains and reinvests. This ratio represents a major capital allocation decision by the company, and can be used to judge management rationality. Rational management should pay out all earnings that cannot be productively reinvested. Therefore, a low dividend payout ratio for a profitable company with a low growth potential may be a warning sign.
Many investors use the P/B ratio as a quick way of judging company valuation. Value investors - followers of Graham and Dodd - specifically seek out companies with low P/B ratios. However, investors should be careful not to make investment decisions on this metric alone, without considering a company's earning and growth potential, since a low P/B ratio can be a sign of a bleak future for the business.
P/E ratio is a popular way of making a quick judgment of a company valuation. Value investors - followers of Graham and Dodd - often seek solid companies with low P/E ratios as investment opportunities. However, P/E ratio represents an oversimplified approach to business valuation, and can often lead to incorrect investment decisions.
On July 2, 1997, the Company completed the acquisition of Petrolite Corporation ("Petrolite") and Wm. S. Barnickel & Company ("Barnickel"), the holder of 47.1% of Petrolite's common stock. In the aggregate, BHI will issue 19.277 million shares of its common stock to Petrolite and Barnickel shareholders having an aggregate value of approximately $729 million... resulting in total consideration in the acquisition of approximately $750 million.
On August 10, 1998, Baker Hughes completed a merger with Western Atlas Inc. by issuing 148.6 million shares of the Company's common stock for all of the outstanding common stock of Western Atlas.
On April 28, 2010, we completed a cash and stock merger with BJ Services Company ("BJ Services") whereby we acquired 100% of the outstanding common stock of BJ Services, a leading provider of pressure pumping and oilfield services. The merger consideration totaled $6.9 billion based on the closing price of our stock on April 28, 2010. Under the terms of the merger agreement, each share of BJ Services common stock was converted into 0.40035 shares of our common stock and $2.69 in cash. In total, we paid out $0.8 billion in cash, issued 118.0 million shares, valued at $6.1 billion based upon the closing price of our common stock on the Closing Date, and assumed outstanding stock options held by BJ Services employees and directors. We also guaranteed $500 million of long-term debt of BJ Services. The merger will be accounted for using the acquisition method of accounting.
As a result of our impairment testing in the second quarter of 2016, certain machinery and equipment, with a total carrying value of $754 million, was written down to its estimated fair value, resulting in an impairment charge of $240 million. These assets remain in use. Additionally, certain intangible assets, with a total carrying value of $174 million, were written down to their estimated fair values, resulting in an impairment charge of $89 million. Total impairment charges for the three and six months ended June 30, 2016 were $329 million and $447 million, respectively. The majority of the impaired machinery and equipment and intangible assets related to our pressure pumping business in North America, Middle East and Asia Pacific.
Baker Hughes announced on July 3, 2017 that the transaction combining GEs oil and gas business with Baker Hughes is complete. Stockholders of Baker Hughes immediately prior to the closing of the transaction received one share of Class A common stock of Baker Hughes, a GE company and are also entitled to a special one-time cash dividend of $17.50 per share (to be paid on July 6, 2017). The combination created Baker Hughes, a GE company, which will be traded on the New York Stock Exchange (NYSE) under the ticker symbol "BHGE".