Acquired by Analog Devices in 2017, Linear Technology made analog integrated circuits for power management, data conversion, signal conditioning, and wireless sensing used in communications, networking, industrial, automotive, computer, medical, instrumentation, consumer, and military and aerospace systems.
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 April 17, 2007 the Company's Board of Directors authorized a $3.0 billion accelerated stock repurchase transaction ("ASR"). As part of the ASR the Company entered into two stock-repurchase confirmations with a financial institution. Under these confirmations, the Company provided the financial institution with an up-front payment totaling $3.0 billion that is included in the "Purchase and retirement of common stock" in the fiscal 2007 Statement of Stockholders Equity. Upon completion of the ASR, the Company may receive additional shares in the first and third quarters of fiscal 2008, depending on the volume weighted-average price, during the averaging periods as detailed below. If additional shares are received in the first and third quarters of fiscal 2008, a reclassification adjustment will be recorded within stockholders' (deficit) equity in those periods. The number of shares of common stock that will be delivered to the Company for the first confirmation will be determined based on the daily volume weighted average price of the Company's common stock over an approximately three-month period that commenced shortly after the issuance of the Company's $1.7 billion Convertible Senior Notes in April 2007. Under the terms of the first $1.5 billion confirmation the Company was delivered 33.3 million shares of its common stock during the fourth quarter of fiscal 2007. The first confirmation ended during the first quarter of fiscal 2008 and the Company was delivered an additional 7.7 million shares. The 2007 Statement of Stockholders Equity has been adjusted for the receipt of the additional 7.7 million shares. Under the terms of the second confirmation, the Company was delivered 38.9 million shares of its common stock during the fourth quarter of fiscal 2007. The exact number of shares for the second confirmation will be determined based on the daily volume weighted average price of the Company's common stock (subject to a per share floor price and cap price resulting in a purchase by the Company under that part of the ASR of no fewer than approximately 38.9 million shares of common stock and not more than approximately 42.5 million shares of common stock) over the subsequent approximately six-month period.
Linear Technology Corporation was acquired by Analog Devices, Inc. Linear Technology shareholders received $46.00 per share in cash and 0.2321 of a share of Analog Devices common stock for each share of Linear Technology common stock they held at the closing of the transaction. The transaction valued Linear Technology at approximately $60.00 per share, representing an equity value for Linear Technology of approximately $14.8 billion.