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CHAPTER 4 Assessment of Business Performance 129 cover its debts, however. As we’ve already observed, the asset amounts recorded on the balance sheet are generally not indicative of current economic values, or even liquidation values. Nor does the ratio give any clues as to likely earnings and cash flow fluctuations that might affect current interest and principal payments. Debt to Capitalization A more refined version of the debt proportion analysis involves the ratio of long- term debt to capitalization (total invested capital). The latter is again defined as the sum of the long-term claims against the business, both debt and owners’ equity, but doesn’t include short-term (current) liabilities. This total also cor- responds to net assets, unless some adjustments were made, such as ignoring deferred taxes. The calculation appears as follows, when the current portion of long-term debt, long-term liabilities, and deferred taxes are included in the debt total: Debt to capitalization: ϭ ϭ 56.6% (1996: 41.9%) If deferred taxes are excluded from debt, the ratio changes to 55.1 percent and 34.7 percent, respectively. The ratio is one of the elements that rating companies such as Moody’s take into account when classifying the relative safety of debt. Another definition of debt is sometimes used, which includes (1) short-term debt (other than trade credit), (2) the current portion of long-term debt, and (3) all long-term debt in the form of contractual obligations. In this case, long-term liabilities like set-asides representing potential employee benefit claims and deferred taxes are not counted as part of the capitalization of the company, which is (1) the sum of debt as defined above, plus (2) minority interests, and (3) shareholders’investment (equity). In TRW’s case, the debt total thus becomes $1,656 ($411 ϩ $128 ϩ $1,117), and the capitalization becomes $3,385 ($1,656 ϩ $105 ϩ $1,624), resulting in a ratio of 48.9 percent for 1997 and 20.6 percent for 1996. As is apparent, the greater the uncounted portions of the capital structure, the less this version of the debt ratio represents the full balance of the various elements of the capital base of a company. A great deal of emphasis is placed on the ratio of debt to capitalization, carefully defined for any particular company, because many lending agreements of both publicly held and private corporations contain covenants regulating max- imum debt exposure expressed in terms of debt to capitalization proportions. There remains an issue of how to classify different liabilities, and how to deal with accounting changes, as most companies, including TRW, experienced estab- lishing long-term liabilities for future employee benefits. As we’ll see later, however, there is growing emphasis on a more relevant aspect of debt exposure, namely, the ability to service the debt from ongoing funds flows, a much more dynamic view of lender relationships. $2,090 $3,691 Long-term debt Capitalization (net assets) hel78340_ch04.qxd 9/27/01 11:07 AM Page 129 130 Financial Analysis: Tools and Techniques Debt to Equity A third version of the analysis of debt proportions involves the ratio of total debt, frequently defined as the sum of current liabilities and all types of long-term debt, to total owners’ equity, or shareholders’ investment. The debt to equity ratio is an attempt to show, in another format, the relative proportions of all lender’s claims to ownership claims, and it is used as a measure of debt exposure. The measure is expressed as either a percentage or as a proportion, and in the example shown be- low, the figures again were taken from TRW’s balance sheet in Figure 4–2: Debt to equity: ϭ ϭ 271% (1996: 163%) In preparing this ratio, as in some earlier instances, the question of deferred income taxes and other estimated long-term liabilities is often sidestepped by leaving these potential long-term claims out of the debt and capitalization figures altogether. We have included all of these elements here. One specific refinement of this formula uses only long-term debt, as related to shareholders’ investment, ignoring long-term obligations and deferred taxes. Debt to equity (alternate): ϭ ϭ 72.0% (1996: 23.6%) The various formats of these relationships imply the care with which the ground rules must be defined for any particular analysis, and for the covenants governing specific lending agreements. They only hint at the risk/reward trade-off implicit in the use of debt, which we’ll discuss in more detail in Chapters 9 and 11. Debt Service Regardless of the specific choice from among the several ratios just discussed, debt proportion analysis is in essence static, and does not take into account the operating dynamics and economic values of the business. The analysis is totally derived from the balance sheet, which in itself is a static snapshot of the financial condition of the business at a single point in time. Nonetheless, the relative ease with which these ratios are calculated proba- bly accounts for their popularity. Such ratios are useful as indicators of trends when they are applied over a period of time. However, they still don’t get at the heart of an analysis of creditworthiness, which involves a company’s ability to pay both interest and principal on schedule as contractually agreed upon, that is, to service its debt over time. $1,245 $1,729 Long-term debt † Shareholders’ investment (equity) ‡ $4,681 $1,729 Total debt Shareholders’ investment (equity)* *Includes minority interests. † Includes current portion of long-term debt. ‡ Includes minority interests. hel78340_ch04.qxd 9/27/01 11:07 AM Page 130 CHAPTER 4 Assessment of Business Performance 131 Interest Coverage One very frequently encountered ratio reflecting a company’s debt service uses the relationship of net profit (earnings) before interest and taxes (EBIT) to the amount of the interest payments for the period. This ratio is developed with the expectation that annual operating earnings can be considered the basic source of funds for debt service, and that any significant change in this relationship might signal difficulties. Major earnings fluctuations are one type of risk considered. No hard and fast standards for the ratio itself exist; rather, the prospective debt holders often require covenants in the loan agreement spelling out the number of times the business is expected to cover its debt service obligations. The ratio is simple to calculate, and we can employ the EBIT figure developed for TRW earlier in the management section: Interest coverage: ϭ ϭ 11.5 times (1996: 9.2 times) The specifics are based on judgment, often involving a detailed analysis of a company’s past, current, and prospective conditions. Burden Coverage A somewhat more refined analysis of debt coverage relates the net profit of the business, before interest and taxes, to the sum of current interest and principal repayments, in an attempt to indicate the company’s ability to service the burden of its debt in all aspects. A problem arises with this particular analysis, because interest payments are tax deductible, while principal repayments are not. Thus, we must be on guard to think about these figures on a comparable basis. One correction often used involves converting the principal repayments into an equivalent pretax amount. This is done by dividing the principal repayment by the factor “one minus the effective tax rate.” The resulting calculation appears as follows, using the $89 million in principal repayments (due in over 90 days) TRW paid in 1997, as shown in the cash flow statement in its 1997 annual report (see Chapter 3): Burden coverage: ϭ ϭ ϭ 3.99 times An alternate format uses operating cash flow (net profit after taxes plus write-offs), developed from Figure 4–3, to which after-tax interest has been added back. This is then compared to the sum of after-tax interest and principal repayment, and the calculation for 1997 appears as follows: $863 $75 ϩ $141 $863 $75 ϩ $89 (1 Ϫ .37) Net profit before interest and taxes (EBIT) Interest ϩ Principal repayments (1 Ϫ tax rate) $863 $75 Net profit before interest and taxes (EBIT) Interest hel78340_ch04.qxd 9/27/01 11:07 AM Page 131 132 Financial Analysis: Tools and Techniques Burden coverage: ϭ ϭ ϭ 7.62 times Fixed Charges Coverage A more inclusive concept is the combination of interest and rental expenses into a fixed charges amount, which is then compared to pretax earnings to which these fixed charges are added back. In the case of TRW, its published statistics included a calculation of fixed charges coverage which combined one-third of rental expenses and interest paid, which was then related to pretax earnings plus this total. In 1997, the fixed charges coverage was 2.9 times, and in 1996 it was 3.4 times. Cash Flow Analysis Determining a company’s ability to meet its debt obligations is most meaningful when a review of past profit and cash flow patterns is made over a long enough period of time to indicate the major operational and cyclical fluctuations that are normal for the company and its industry. This might involve financial statements covering several years or several seasonal swings, as appropriate, in an attempt to identify characteristic high and low points in earnings and funds needs. The pattern of past conditions must then be projected into the future to see what margin of safety remains to cover interest, principal repayments, and other fixed payments, such as major lease obligations. These techniques will be discussed in Chapter 5. If a business is subject to sizable fluctuations in after-tax cash flow, lenders might be reluctant to extend credit when the debt service cannot be covered several times at the low point in the operational pattern. In contrast, a very stable business would encounter less-stringent coverage demands. The type of dynamic analysis involved is a form of financial modeling that can be greatly enhanced both in scope and in the number of possible alternative conditions explored by using spreadsheets or full-fledged corporate planning models. Ratios as a System The ratios discussed in this chapter have many elements in common, as they are derived from key components of the same financial statements. In fact, they’re often interrelated and can be viewed as a system. The analyst can turn a series of ratios into a dynamic display highlighting the elements that are the most important levers used by management to affect operating performance. In internal analysis, many companies employ a variety of systems of ratios and standards that segregate into their components the impact of decisions affect- $1,036 $136 $989* ϩ $75 (.63) $75 (.63) ϩ $89 Operating cash flow ϩ Interest (1 Ϫ tax rate) Interest (1 Ϫ tax rate) ϩ Principal repayments hel78340_ch04.qxd 9/27/01 11:07 AM Page 132 CHAPTER 4 Assessment of Business Performance 133 ing operating performance, overall returns, and shareholder expectations. Du Pont was one of the first to do so early in the last century. The company published a chart showing the effects and interrelationships of decisions in these areas, which focused on the linkages to return on equity as the key result and represented a first “model” of its business. The Du Pont system was built on accounting relationships only, as cash flow concepts and measures were not in vogue at that time. Companies that engage in value-based management, as we’ll discuss in Chapter 12, develop relationships in their planning models and operational systems that focus on value drivers and shareholder value creation, using a mix of cash flow measures and appropriate physical and accounting ratios. For purposes of illustrating the basic principles here we’ll demonstrate the relationships between major accounting ratios discussed earlier, using two key pa- rameters segregated into their elements: return on assets, which is of major importance for judging management performance, and return on equity, which serves as the key measure from the owners’ viewpoint. We’ll leave aside the re- finements applicable to each to concentrate on the linkages. As we’ll show, it’s possible to model the performance of a given company by expanding and relating these ratios. Needless to say, careful attention must be paid to the exact definition of the elements entering into the ratios for a particular company to achieve internal consistency. Also, it’s important to ensure that the ratios are interpreted in ways that foster economic trade-offs and decisions in support of shareholder value creation. Elements of Return on Assets We established earlier that the basic formula for return on assets (ROA) was a simple ratio, into which different versions of the elements can be inserted: Return on assets ϭ We also know that net profit was related both to asset turnover and to sales. Thus, it is possible to restate the formula as follows: Return on assets ϭϫ Note that the element of sales cancels out in the second formula, resulting in the original expression. But we can expand the relationship even further by sub- stituting several more basic elements for the terms in the equation: ROA ϭ ϫ Price ϫ Volume Fixed ϩ Current ϩ Other assets (Gross margin Ϫ expenses)(1 Ϫ tax rate) Price ϫ Volume Sales Assets Net profit Sales Net profit Assets hel78340_ch04.qxd 9/27/01 11:07 AM Page 133 134 Financial Analysis: Tools and Techniques The relationships expressed here serve as a simple model of the key drivers on which management can focus to improve return on assets. For example, improvement in gross margin is important, as is control of expenses. Price/volume relationships are canceled out, but we know they are essential factors in arriving at a satisfactory gross margin, as is control of cost of goods sold. (We could have substituted “price/volume less cost of goods sold” for gross margin in the first bracket.) All along we’ve said that asset management is very important. The model shows that the return on assets will rise if fewer assets are employed and if all the measures of effective management of working capital are applied. Minimizing taxes within the legal options available also will improve the return. Elements of Return on Equity A similar approach can be taken with the basic formula for return on owners’ equity (ROE), which relates profit and the amounts of recorded equity: Return on equity ϭ If we use some of the basic profit and turnover relationships to expand the expression, the following formula emerges: Return on equity ϭϫ Note that, in effect, the formula states that return on equity (ROE) consists of two elements: • The net profit achieved on the asset base. • The degree of leverage or debt capital used in the business. “Assets to equity” is a way of describing the leverage proportion. We can expand the formula even more to include the key components of return on assets: ROE ϭϫ ϫ Once again we can look for the key drivers management should use to raise the return on owners’equity. It’s not a surprise that improving profitability of sales (operations) comes first, combined with effective use of the assets that generate sales. An added factor is the boosting effect from successful use of debt in the capital structure. The greater the liabilities, the greater the improvement in return on equity—assuming, of course, that the business is profitable to begin with and at a minimum continues to earn more on its investments than the cost of debt. As we know, of course, value creation depends on overall returns above the cost of capital, which is not expressed in this particular formula. Assets Assets Ϫ Liabilities Sales Assets Net profit Sales Assets Equity Net profit Assets Net profit Equity hel78340_ch04.qxd 9/27/01 11:07 AM Page 134 CHAPTER 4 Assessment of Business Performance 135 Using other people’s money can be quite helpful—until the risk of default on debt service in a down cycle becomes significant. The analyst can use this simple framework to test the impact on the return on equity from one or more changed conditions, and to test how sensitive the result is to the magnitude of any change introduced. A more inclusive format of the relationship of key ratios to each other and to the three major decision areas is displayed in Figure 4–4. We’ve added the major drivers behind the ratios on the left, as an indication of the levers management can use in managing the company. Note that in this diagram, we’ve included the cost of interest on debt as part of the “net contribution from leverage” in the financing area, while properly defining operating earnings as excluding the cost of interest. This representation can be viewed as a simple model of a business in an accounting ratio format. It can be useful in tracing through the ultimate effects from changes in any of the basic drivers that are brought about by management decisions. For example, note that an increased level of inventories will reduce working capital turnover, which lowers the return on investment, and in the end, the return on equity. Or take an increase in debt (leverage), where the funds obtained are successfully invested with a rate of return higher than the interest cost—this will make a positive contribution to the return on equity. The latter example also illustrates that different degrees of leverage employed by companies being compared can affect the comparability of the return on equity measure. A word of caution is in order, however. The neat precision implied in this arrangement must not blind us to the fact that while accounting ratios are com- monly used indicators, the ultimate driver of TSR and shareholder value is the pattern of cash flows achieved and, more importantly, expected by the stock market. This represents an economic viewpoint which transcends the shortcomings of accounting statements and relationships, and expresses market valuation as a cash flow mechanism—a concept which has been confirmed by many empirical studies. The roots of the system on the left of the diagram are the basic conditions which drive success or failure as expressed in these accounting ratios. These drivers are common to accounting and cash flow reasoning; The difference is in the way the results are expressed. As we’ll discuss in Chapter 12, value creation depends on effective management of all the basic drivers, but the ultimate result must be viewed in cash flow terms. Does this mean that we cannot really use the various tools and relationships we’ve discussed in this chapter? Not at all. The challenge to analysts and man- agers is to constantly be aware of the cash flow implications of their decisions in addition to any accounting-based analysis. Accounting ratios and data at times will conflict with economic choices, especially in the near term, and some of them will not be useful for a particular decision. Over the long run, measures such as return on equity and return on net assets will tend to converge with cash flow results. The rule to observe at all times is that true economic trade-offs must be hel78340_ch04.qxd 9/27/01 11:07 AM Page 135 136 Financial Analysis: Tools and Techniques based on cash flows, and if decisions are consistently analyzed and executed in this manner, positive accounting results will follow in due course. We’ll return to the subject of business modeling again in Chapters 5 and 6, and highlight economic cash flow trade-offs in Chapters 7 through 12. FIGURE 4–4 A Systems View of Key Ratios and Their Elements* Pricing conditions Competitor actions Market potential Supply conditions Labor markets Cost requirements Revenue management Vol. Mix EBIT margin Income tax (before interest) Cost management Lab. Matl. O.H. Mkt. G&A R&D Operating profit after taxes Sales Operating profit margin Return on investment (RONA) Operating profit after taxes Net assets Net income Shareholders' equity Inventory management Receivables management Payables management Capital budgeting Project management Working cap. turnover Sales Working capital Capital turnover Sales Net assets Fixed asset turnover Sales Fixed assets Return on equity (ROE) Operating ratios Investment ratios Financing ratios Long-term debt policy Business risk Payout/ retention Leverage proportions Debt versus equity D/E (ROI – Aftertax interest rate) Net leverage contribution *This diagram is available in an interactive format (TFA Templates). See “Analytical Support” on p. 147. hel78340_ch04.qxd 9/27/01 11:07 AM Page 136 TEAMFLY Team-Fly ® CHAPTER 4 Assessment of Business Performance 137 Integration of Financial Performance Analysis We’ve discussed the great variety of financial ratios and measures available to anyone wishing to analyze the performance of a company and its various units, or of an individual business. We’ve also grouped the measures by points of view and shown their many interrelationships as well as the key management drivers that impact them. At this point, it’ll be helpful to provide a few practical guidelines for structuring the process of using the measures. We’ll briefly address the following key points: • Careful definition of the issue being analyzed and the viewpoint to be taken. • Identifying a combination of primary and secondary measures and tools. • Identifying key value drivers that affect performance. • Trending performance data over time, both historical and prospective. • Finding comparative indicators and supplementary information. • Using past performance as a clue to future expectations. • Recognizing systems issues and obstacles to optimal performance. First, there is nothing more important in any kind of financial/economic analysis than a clear definition of the issue to be addressed, and the viewpoint to be taken. For example, when a banker ponders whether to extend a short-term loan to a business for working capital needs, the key issue is the company’s ability to repay within a relatively short time period. Immediately, the analysis fo- cuses on past and prospective cash flow patterns, supplemented by measures on working capital management and profitability. When a security analyst wishes to assess the quality of a company’s management, the focus will be on past and prospective strategic direction, competitive position, and investment effectiveness. Measures of profitability benchmarked against comparative industry data will be important, as will be indicators of shareholder return and value creation. The point is that every type of analysis—complex or simple—should be preceded by a careful issue definition and choice of viewpoint that will naturally lead to a focused selection of measures to be applied. Second, it should be obvious that most financial/economic analysis has to use a combination of primary and secondary measures to be effective. Rarely will a situation require only a single measure or indicator, since all ratios are limited to some extent both by the nature of the data and by the relationships underlying them. Looking only at the return on equity as a measure of profitability, for example, falls far short of the insights gained when it is combined with key measures of operating earnings, asset turnover, and contribution from leverage, as we saw earlier. It’s good practice to decide which key indicators best fit the specific issue, and which subsidiary ratios or other measures can provide additional hel78340_ch04.qxd 9/27/01 11:07 AM Page 137 138 Financial Analysis: Tools and Techniques insight or verification. The analytical results should then be expressed in these terms. Third, sound analytical practice includes identifying the key value drivers underlying the performance of any business. Whether production-oriented, such as the yield in producing electronic chips, or service-based, such as call volume by sales personnel, performance ratios and measures are usually directly affected by variations in these key drivers. While one can find many kinds of value drivers—internal or external—varying greatly between types of business, there are generally just a few in each situation that really make a difference. The effective analyst makes it a practice to understand what these drivers are, how they affect the broader financial/economic measures used, and how trends in the drivers themselves impact both past and prospective performance. It’s good practice to test the sensitivity of key measures chosen to various value driver conditions, and to include critical value drivers as part of the combination of measures chosen to address the performance issue under review. Fourth, the results of performance analysis are much more meaningful when placed in the context of comparable data about the industry, key com- petitors, or intracompany comparisons of organizational units. It’s here that both the level of performance and key trends can be judged in relative terms. While it’s often hard to find truly comparative data, particularly for multidivisional busi- nesses, the notion of benchmarking business results whenever possible has grown in the past decade as U.S. management has begun to focus on improving competitive effectiveness. The references at the end of this chapter and in Appendix III contain published sources of industry data and ratios, which companies often sup- plement with special efforts to develop even more specific data through detailed benchmarking activities, that is, by sharing experiences with noncompeting companies. Depending on the importance of the issue being analyzed, the industry/ competitive context for viewing performance results can be critical. Fifth, it’s an axiom of good analysis that trends in financial/economic performance be judged in a time frame befitting the nature of the business and its industry, including the aspects of cyclicality, seasonality, growth, and decline discussed in Chapter 3. This calls for developing data series that cover at least several years, in order to judge the trends affecting various aspects of the company’s performance. Sound analysis uses the perspective gained from positive or adverse trends in the primary and secondary performance indicators, and carefully weighs their relative importance to the issue being addressed. Remember also that performance analysis is not just an exercise in historical assessment—rather, it’s the basis from which future expectations are developed. Trend analysis becomes especially important in this context, for the analyst often needs to project future conditions and must decide whether the trends observed are likely to continue, or change, because of foreseeable events. Sixth, viewing past performance as a clue to potential future expectations is a common practice in financial/economic analysis. We’ve already touched on this aspect in our discussion of trend analysis. A word of caution is necessary, how- hel78340_ch04.qxd 9/27/01 11:07 AM Page 138 [...]... 5.76 14. 29 24. 49 17 .49 12 .49 8.93 8.93 8.93 4. 45 10.00 18.00 14. 40 11.52 9.22 7.37 6.55 6.55 6.55 6.55 3.29 5.00 9.50 8.55 7.70 6.93 6.23 5.90 5.90 5.90 5.90 5.90 5.90 5.90 5.90 5.90 2.99 3.75 7.22 6.68 6.18 5.71 5.28 4. 89 4. 52 4. 46 4. 46 4. 46 4. 46 4. 46 4. 46 4. 46 4. 46 4. 46 2.25 hel78 340 _ch 04. qxd 9/27/01 11:07 AM Page 145 CHAPTER 4 Assessment of Business Performance 145 count for and disclose the impact... 50 1Ú 2 $46 1Ú 8 48 1Ú 2 50 3Ú 4 52 $37 7Ú 16 43 1Ú 2 41 1Ú 16 43 3Ú 4 $.31 31 31 31 $.275 275 275 31 Cumulative Serial Preference Stock II $4. 40 Convertible Series 1 1 2 3 4 500 45 7 1Ú 2 600 49 5 300 44 2 300 49 5 379 41 8 500 42 7 379 41 4 300 42 7 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 Cumulative Serial Preference Stock II $4. 50 Convertible Series 3 1 2 3 4 400 40 2 42 3 1Ú 4 420 3 64 396 42 3 1Ú 4 400 332... Year ended December 31 United States Europe Other Areas 1997 1996 1995 $6,919 6 ,46 9 6,212 $3,002 2,522 2,525 $910 866 831 $ Ñ Operating profit (loss) 1997 1996 1995 $ 94 212 5 14 $ 245 2 24 220 $ 64 40 65 $(163) (1 74) (1 74) $ Identifiable assets 1997 1996 1995 $3 ,41 5 3,056 2,871 $1,980 1 ,41 1 1 ,46 4 $5 54 590 537 $ 46 1 842 798 $ 6 ,41 0 5,899 5,670 In millions Sales Interarea sales are not significant to the... 1997 1996 1995 U.S Non-U.S $95 145 $133 169 $42 8 197 $ 240 $302 $625 hel78 340 _ch 04. qxd 9/27/01 11:07 AM 152 Page 152 Techniques of Financial Analysis: A Guide to Value Creation Provision for income taxes In millions 1997 1996 1995 Current U.S federal Non-U.S U.S state and local $136 84 23 $176 73 20 $90 57 17 243 269 1 64 46 (4) 4 (130) (6) (13) 31 14 21 subsidiaries and thereby indefinitely postpone... salvage value of $40 0 †Switch to straight-line in Year 4; required for 15- and 20-year IRS asset classes hel78 340 _ch 04. qxd 9/27/01 11:07 AM Page 144 144 Financial Analysis: Tools and Techniques sets with up to 10 years of life, and a variation of this method, the 150 percent declining balance method, for assets with a 15- and 20-year life Figure 4 6 shows the tax write-off patterns for the six different... $7,032 6 ,49 3 6 ,46 8 $3,799 3,3 64 3,100 $ Ñ Ñ Ñ $10,831 9,857 9,568 Operating profit (loss) 1997 1996 1995 $ 631 319 607 $ (228)(A) 157 192 $(163) (1 74) (1 74) $ Identifiable assets 1997 1996 1995 $4, 307 3,683 3,706 $1, 546 1,278 1,113 $ 557 938 851 $ 6 ,41 0 5,899 5,670 Depreciation and amortization of property, plant and equipment 1997 1996 1995 $ 352 321 3 04 $ 115 112 102 $ 9 10 9 $ 47 6 44 3 41 5 Capital... Read a Financial Report 7th ed New York: Merrill Lynch, 1993 hel78 340 _ch 04. qxd 148 9/27/01 11:07 AM Page 148 Financial Analysis: Tools and Techniques Robert Morris Associates Annual Statement Studies Philadelphia Palepu, Krishna G.; Victor L Bernard; and Paul M Healy Business Analysis and Valuation: Using Financial Statements Cincinnati: Southwestern College Publishing, 1996 Ross, Stephen; Randolph... weighted-average shares and assumed conversions 123.7 130.6 1.1 Ñ 128.7 2.6 4. 1 3.8 132.8 1 34. 4 Basic earnings (loss) per share from continuing operations $(0 .40 ) $1 .41 $3.02 Diluted earnings (loss) per share from continuing operations $(0 .40 ) $1.37 $2. 94 Research and Development 1997 1996 1995 Customer-funded $1,501 Company-funded Research and development 46 1 Product development 1 74 $1 ,42 5 $1,360 41 2 160 392... time, and some still do In the United States, the accounting profession and the Securities and Exchange Commission have expended much effort in developing new ways to ac- F I G U R E 4 6 Tax Depreciation Percentages by ACRS Asset Class Year(s) 3-Year 5-Year 7-Year 10-Year 15-Year 20-Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17–20 21 33.33 44 .45 14. 81 7 .41 20.00 32.00 19.20 11.52 11.52 5.76 14. 29 24. 49... keep the materials discussed within the perspective of financial theory and business practice hel78 340 _ch 04. qxd 9/27/01 11:07 AM Page 146 146 Financial Analysis: Tools and Techniques TE AM FL Y 1 Analysis of business performance is a complex process, which requires a clearly defined viewpoint, careful selection of appropriate measures, and an understanding of the interrelationships of the measures chosen . 6.55 5.90 4. 89 8 4. 45 6.55 5.90 4. 52 9 6.55 5.90 4. 46 10 6.55 5.90 4. 46 11 3.29 5.90 4. 46 12 5.90 4. 46 13 5.90 4. 46 14 5.90 4. 46 15 5.90 4. 46 16 2.99 4. 46 17–20 4. 46 21 2.25 hel78 340 _ch 04. qxd 9/27/01. 7-Year 10-Year 15-Year 20-Year 1 33.33 20.00 14. 29 10.00 5.00 3.75 2 44 .45 32.00 24. 49 18.00 9.50 7.22 3 14. 81 19.20 17 .49 14. 40 8.55 6.68 4 7 .41 11.52 12 .49 11.52 7.70 6.18 5 11.52 8.93 9.22 6.93. salvage value of $40 0. †Switch to straight-line in Year 4; required for 15- and 20-year IRS asset classes. hel78 340 _ch 04. qxd 9/27/01 11:07 AM Page 143 144 Financial Analysis: Tools and Techniques sets

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