Median ebita to average assets a measure of return on

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Median EBITA to average assets (a measure of return on assets) for Baa issuers is highest defense contractors, healthcare, consumer products, and telecommunications industries. This bly reflects a larger required asset base in those industries as the median EBITA margin - ITAas a percent of revenues) is highest for media companies, which rank much lower on the measure, as shown in the following graphic. Median Moody's Baa EBITA Margin ,- - -,- - - - - - - .- - .J ,- - -,- - - -,-- -, -- .J .. " .~--~ - - .~~ J ., :, Aggregate Aaa Aggregate Aa Media Metals & Mining ~ & Environment Healthcare -elecommunications Transportation Aggregate A Aggregate Baa Consumer Products -'£I'OSpace& Defense Aggregate Ba Services Manufacturing Chemicals Aggregate B Retail & Distribution Automotive Aggregate Caa-C 0.0% 15.0% 25.0% 30.0% 20.0% 5.0% 10.0% ::ource: Moodis Financial Metrics
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What Financial Ratios Matter? We cited a number of fmancial and nonfinancial factors that analysts consider when developi _ credit ratings. UBS ( ). global investment banking and securities firm, measured the correlation between credit ratios, such as those described in this section, and bond ratings. TIr "t-statistics" from those correlations are in the following chart ("The New World of Credit Ratings," UBSInvestment Bank, 2004): 7-27 Module 7 I Liability Recognition and Nonowner Financing Size (Market Cap) Size (Sales) Size (Assets) ---- '-~ .,;4>_-_ "::JII I s: ! I I '• .s ..... " .•••.• .'::::::. ---~. ' I -- -.---,-- _J .. I I ~ Beginning of decade •• 13 End of decade W£J=- Iii!. ;;; 111 C"':::":JII r- ~ Market Leverage DebtlEBITDA EBITDA Coverage EBIT Coverage Book Leverage FFO/Debt ROCE Margin Current Ratio Cash Conversion Ratio Liquidity Ratio o 10 20 30 40 50 60 70 80 90 Correlation with Bond Credit Ratings (Absolute t-Statistic) 100 Measures relating to the size of the company, its financial leverage, and its cash flow in relatio to its debt payment obligations, are most highly correlated with bond credit ratings (implying higher "t-statistic"). These findings are consistent with the analysis and focus of this module. ANALYZING GLOBAL REPORTS The FASB and the IASB have worked on a number ofjoint convergence projects and the differences in accounting for liabilities are limited. We list here some differences that we encounter in studying IFRS financial statements and the implications for comparing GAAP and IFRS companies. Under U.S. GAAP, if a contingent liability is probable it must be disclosed and if it can also be reasonably estimated, it must be accrued. Under IFRS, companies can limit disclosure of contingent liabilities if doing so would severely prejudice the entity's competitive or legal position; for example, disclosing the amount of a potential loss on a lawsuit could sway the legal outcome. Accordingly, IFRS likely yields less disclosure of contingencies. Accruals sometimes involve a range of estimates. If all amounts within the range are equally probable, U.S. GAAP requires the company to accrue the lowest number in the range whereas IFRS requires the company to accrue the expected amount. Also, contingencies are discounted under IFRS if the effect of discounting is material whereas U.S. GAAP records contingencies at their nominal value. For both of these reasons, contingent liabilities are
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