Operational Efficiency Analysis: Abbott Laboratories (ABT)

Name of Company Country of Origin/ Exchange Traded Sector Stock Price
Healthcare – Medical Devices – Medical Devices USD60.49
@ 28 Jun 2018
COMPANY PROFILE Abbott Laboratories is a health care company that manufactures medical devices, blood glucose monitoring kits, nutritional healthcare products, diagnostic products and equipment, and branded generic drugs.

Abbott manufactures and markets medical devices, blood glucose monitoring kits, nutritional healthcare products, diagnostic products and equipment, and branded generic drugs. Products include pacemakers, implantable cardioverter defibrillators, coronary stents, catheters, infant formula, nutritional liquids for adults, vessel closure devices, and Lasik equipment. Abbott derives approximately 60% of sales outside the United States.

Stock Code ABT
Analysis of Operational Efficiency Below

Abbott Laboratories Piotroski Score

The Piotroski Score measures the operational efficiency of a company. It is a well-rounded indicator that measures profitability, quality of earnings, financial condition and operating efficiency. Research has show that companies with high Piotroski scores outperform those with low scores. Piotroski scores range from a low of zero to a high of nine based on whether the company passes or fails certain criteria.
Criteria Score
Return on Asset (Net Income / Asset) is positive           1
Change in Return on Asset is positive over previous year          –
Return on Asset measures a company’s ability to generate profits from the use of its assets.
Cash Flow Return on Asset (Cash from Operations / Asset) is positive           1
Cash Flow Return on Asset higher than Return on Asset           1
Cash Flow Return on Assets goes one step further to ensure that it is not just paper profits but cash flow that the company is generating.
Change in long-term debt / Asset is positive (i.e. borrowing less)           1
Change in Current Ratio (Current Assets / Current Liabilities) is positive          –
Current Ratio is a measure of a company’s liquidity position and determines whether it has sufficient liquid assets to meet short-term liabilities.
Number of shares this year less than last year          –
The number of shares is compared with the previous year as a company that is not generating healthy cash flow may end up raising new equity and this is indicative of the health of the company.
Change in Gross Profit Margin is positive          –
Gross Profit Margin is a measure of whether the company is selling its products/services at a high enough margin to cover its operating expenses.
Change in Asset Turnover (Sales / Assets) is positive          –
Asset Turnover is a measure of how well a company uses its assets to generate sales.
Total (Piotroski Score)           5
Determining the operational efficiency of a company is important as companies with high Piotroski scores tend to outperform the ones with lower scores. However, one needs to guard against paying too much for quality companies. A good company is not necessarily a good investment if the price is not right. In order to determine the fair valuation of the stock, we need to use multiple valuation indicators.
The five ratios we use are Price to Earnings, Price to Sales, Price to Cash Flow, Price to Book and Dividend Yield. We use multiple methods to value a stock because each has its benefits as well as shortcomings. Price to Earnings and Price to Cash Flow Ratios relate stock price to profitability but are meaningless when the comany has negative earnings or cash flows. Price to Sales Ratio is more stable because sales are never negative. However, this does not tell us whether the company is able to sell profitably. Price to Book Ratio gives us an indication as to how much we are paying for the company’s assets but it is not directly related to the company’s profitability. Dividend Yield cannot be used for companies that are paying little to no dividends.
While it is important to value stocks based on multiple valuation methods, this often leads to differing views on valuation. One indicator may suggest that a stock is overvalued while another suggest that it is undervalued. This does not help an investor who needs to make a definite decision whether to buy, hold or sell the stock. That is why we advocate the use of a Composite Valuation Indicator, which is derived from the best combination of the five indicators above. A Composite Valuation Indicator will give you ONE conclusion on whether a stock is under or over valued.
To find out more about our valuation methodology, click here. 
Source of Data: Charts are from ProThinker Stock Report. Company description, historical financial statements data and price data are from gurufocus.com. Estimates are from gurufocus and/or 4-traders.com – Thomson Reuters.
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