Acquired in 2010, IMS Health was a global provider of market intelligence to the pharmaceutical and healthcare industries.
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 26, 1999, having received the approval of Gartner Group, Inc. ("Gartner") shareholders and the Boards of Directors of both the Company and Gartner, the Company completed a spin-off of the majority of its equity investment in Gartner to IMS Health shareholders (the "Gartner Spin-Off"). The distribution consisted of 0.1302 shares of Gartner Class B Common Stock for each share of the Company's Common Stock outstanding on the July 17, 1999 record date and totaled 40.7 million Gartner Class B shares. Upon shareholder approval, the consolidated financial statements of the Company were reclassified for all periods presented to reflect the Gartner equity investment as a discontinued operation. The Company has a remaining equity investment in Gartner, (consisting of 6,909,457 Gartner Class A shares and warrants to purchase a further 599,400 Gartner Class A shares) the premier provider of research and advisory services to the information technology industry, which it plans to dispose of.
On August 31, 2000, the Company completed the Synavant Spin-Off as an independent publicly traded company. Prior to the Synavant Spin-Off, the Company transferred to Synavant selected assets and liabilities held by the Company and its subsidiaries related to the Synavant business. Synavant's businesses included the pharmaceutical industry automated sales and marketing support businesses previously operated by IMS Health Strategic Technologies Inc. and certain other foreign subsidiaries of the Company, substantially all of the Company's interactive and direct marketing business, including the business of Clark O'Neill, Inc., a wholly-owned subsidiary of the Company, and a majority stake in a foreign joint venture. The Company distributed (the "Synavant Distribution") to its shareholders of record as of the close of business on July 28, 2000 all of the outstanding shares of common stock, par value $0.01 per share, of Synavant (the "Synavant common stock"). The Synavant Distribution was effected by means of a pro rata dividend to the Company shareholders of one share of Synavant common stock (together with the associated preferred share purchase right) for every twenty shares of common stock, par value $0.01 per share, of the Company (the "IMS common stock") held.
On January 9, 2003, the Company commenced an exchange offer to distribute its majority interest in CTS. The Company offered to exchange 0.309 shares of CTS class B common shares for each share of IMS that was tendered. The exchange offer, which was oversubscribed, expired on February 6, 2003. Under terms of the offer, the Company accepted 36,540,129 tendered IMS common shares in exchange for all 11,290,900 CTS common shares that IMS owned. As the offer was oversubscribed, the Company accepted tendered IMS shares on a pro-rata basis in proportion to the number of shares tendered. The proration factor was 21.115717%. As a result of this exchange offer, IMS no longer has any continuing ownership interest in CTS and reacquired approximately 35.0 million shares of IMS common stock.
On December 4, 2004, we announced a stock repurchase program to buy up to 10,000,000 shares of our common stock. Unless terminated earlier by resolution of our Board of Directors, the December 2004 program will expire when we have repurchased all shares authorized for repurchase thereunder. As of December 31, 2005, we had repurchased 9,625,800 shares under the December 2004 program. On November 16, 2005, we announced another stock repurchase program to buy up to 10,000,000 shares of the Company's common stock. Unless terminated earlier by resolution of our Board of Directors, this program will expire when we have repurchased all shares authorized for repurchase thereunder. As of December 31, 2005, no shares had been purchased under the November 2005 program. On January 25, 2006, our Board of Directors authorized a repurchase program to buy up to 30,000,000 shares of our common stock. On January 31, 2006, we purchased 25,000,000 shares of our common stock pursuant to an accelerated share repurchase program.
IMS Health, the world's leading provider of market intelligence to the pharmaceutical and healthcare industries, today announced the completion of its acquisition by entities created by certain affiliates of TPG Capital, L.P. ("TPG") and the CPP Investment Board ("CPPIB")... Pursuant to the terms of the merger agreement, IMS Health's stockholders are entitled to receive $22.00 in cash, without interest, less any applicable withholding taxes, for each share of IMS Health common stock owned by them. As a result of the merger, IMS Health's common stock will no longer be listed for trading on the New York Stock Exchange.