Analysis of Steris Annual Report: Capital Structure and Stock Performance

This report analyses the annual report of Steris and comments upon its capital structure. It further computes the debt ratios of the company and analyses the leverage position of the entity. The report also determines return on stock over the past 5 year period of time.

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Table of Contents
Introduction................................................................................................................................2
Determination of major source of capital...................................................................................2
Computation of debt ratios.........................................................................................................3
Determination of return on stock...............................................................................................5
Conclusion..................................................................................................................................5
Reference....................................................................................................................................7

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Introduction
Steris offers services and products for infection prevention and other associated
products. It is focussed mainly on medical devices, pharmaceutical and medical products to
the customers. It further offers the customers unique mix of the innovative capital equipments
like washers, sterilizers, equipment system for management, surgical tables and connectivity
solution. Aim of the report is to analyse the annual report of Steris and comment upon its
capital structure. The report will further compute the debt ratios of the company and will
analyse the leverage position of the entity. The report will also determine return on stock over
the past 5 year period of time ("Financials - Annual Reports | STERIS Corporation", 2019).
Determination of major source of capital
From the above table it can be identified that for the year ended 31st March 2018,
major source of the capital was equity as the equity component of capital structure is 60.88%
whereas the debt component is only 39.12% ("Financials - Annual Reports | STERIS
Corporation", 2019). Higher equity component as against the debt component indicates that
the company is less dependent on outside borrowing and hence, is lower leveraged. On the
contrary, companies with higher debt financing will make overburdened with interest risk
that may question its sustainability for the long term period (Serfling, 2016).

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Computation of debt ratios
Debt – equity ratio – the debt to equity ratio is the measure of relative contribution of
shareholders and creditors or the owners in capital employed of the business. To be more
specific, ratio of total long-term debt and the equity capital in the capital structure of the
business is known as the debt-equity ratio. It is computed through dividing the total liabilities
of the company by the equity (Graham, Leary & Roberts, 2015). This ratio provides the idea
regarding how much of the borrowed capital can be fulfilled by the shareholder’s
contribution in case of liquidation. It is used for assessing the financial leverage and the
entity’s soundness and is computed through last year’s data. Low debt to equity ratio is
considered as favourable from the viewpoint of investment as it is less risky while the interest
rate is in increasing trend. The debt to equity ratio of 1:1 indicates that the shareholders and
the creditors have equal contribution to the asset of the company. Ratio less than 1 indicates
that the proportion of equity is higher as compared to debt while the ratio of greater than 1
states that the proportion of equity is lower as compared to debt (Yuliana, Datien & Si, 2017).
Generally, the creditors prefer low debt to equity ratio as low ratio that is lower than 1
indicates that they are well protected for their money. However, the shareholders prefer high
ratio as they want to be benefitted from funds provided by creditors. Looking into the debt to
equity ratio of the Steris for the last 5 years it can be stated that though the ratio of the
company increased from 0.82 to 0.96 from the year 2014 to 2015, the company improved its
position and till 2018 the debt to equity ratio is in reducing trend and reduced to 0.62 in the

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year 2018 ("Financials - Annual Reports | STERIS Corporation", 2019). For all the years
under concern the ratio was lower than 1 that indicates that the equity component is higher as
compared to debt component (De Mooij & Hebous, 2017). Hence, it can be stated that the
debt equity position of the company over the years have been improved.
Debt to asset ratio – the debt to asset ratio of the entity that represents percentage of total
asset paid for with the borrowed money that is reported as debt in the balance sheet. It can be
considered as an indicator for the financial leverage or as the measure of solvency. However,
it is also used as the critical insight for analysing the financial health of the entity. Debt to
asset ratio of 0.50 indicates that 50% of the asset is financed by debt while rest 50% is
financed by equity. High debt to asset ratio that is more than 1 indicates that the entity will
face issues in borrowing additional money or may have to borrow at higher rate of interest as
compared to the situation where the ratio is lower (Zainudin & Hashim, 2016). Generally the
highly leveraged entities put themselves at insolvency risk or the risk of bankruptcy based on
the industry type or company type. It is calculated through dividing the total debt by total
assets of the entity. Looking into the debt to asset ratio of Steris for the last 5 years it can be
stated that though the ratio of the company increased from 0.45 to 0.49 from the year 2014 to
2015, the company improved its position and till 2018 the debt to asset ratio is in reducing
trend and reduced to 0.38 in the year 2018 ("Financials - Annual Reports | STERIS
Corporation", 2019). For all the years under concern the ratio was lower than 1 that indicates
that the asset was majorly financed by equity as compared to debt component (Zheng, 2018).
Hence, it can be stated that the debt to asset position of the company over the years have been
improved.
Therefore, if the overall debt position of the entity is considered it can be stated that
the leverage position of the entity over the last 5 years has been improved.

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Determination of return on stock
Analysing the stock return or the performance of stock is very crucial for the investors
and it has different aspect for each investors as each of the investor has different plan for the
purpose of diversification and has different investing strategy. For analysing any stock, its
performance shall be evaluated. The investor may be satisfied with 10% return, however, if
other stocks in the market are paying more return then the investor may require to take some
to evaluate the performance of the stock (İzgi & Duran, 2016). Looking into the performance
of the stock for the last 5 years it can be stated that the return on Steris stock has provided
17.67% of return in 2014 and the same has been increased to 40.54% for the year closed on
31st March 2015. However, for next 2 years the return significantly started falling and
provided only 6.10% return for the year closed on 31st March 2017 ("Financials - Annual
Reports | STERIS Corporation", 2019). However, the stock return for the year closed on 31st
march 2018 has been improved and provided 29.89% of return to the investors. Hence, it can
be stated though the return over the last 5 years was fluctuating, the company always
provided positive returns to its investors (Lin et al., 2018). Thus, from the investor’s point of
view Steris is a good company for the purpose of investment as the main concern of the
investors is to get positive return on their investment.
Conclusion
From the above discussion and analysis it can be concluded that the capital structure
of the entity includes equity as major component as it is more than 60%. On the other hand

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debt component of the capital structure is only 39.12%. Looking into the debt ratio of the
company it can be stated that both the debt ratio that is debt to equity ratio as well as debt to
asset ratio has been improved over the last 5 years period. Hence, it can be stated that the
company has improved its leverage position. If the stock return trend of the company is
considered over the last 5 year it can be stated that the company always provided positive
return on the stock for its investors. Hence, if the overall performance of the company is
considered it can be stated that the company’s performance has been improved over the last 5
year period.

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Reference
De Mooij, R. A., & Hebous, S. (2017). Curbing Corporate Debt Bias. International Monetary
Fund.
Financials - Annual Reports | STERIS Corporation. (2019). Retrieved from
http://phx.corporate-ir.net/phoenix.zhtml?c=68786&p=irol-reportsannualGraham, J.
R., Leary, M. T., & Roberts, M. R. (2015). A century of capital structure: The
leveraging of corporate America. Journal of Financial Economics, 118(3), 658-683.
İzgi, B., & Duran, A. (2016). 3D extreme value analysis for stock return, interest rate and
speed of mean reversion. Journal of Computational and Applied Mathematics, 297,
51-64.
Lin, F. L., Yang, S. Y., Marsh, T., & Chen, Y. F. (2018). Stock and bond return relations and
stock market uncertainty: evidence from wavelet analysis. International Review of
Economics & Finance, 55, 285-294.
Serfling, M. (2016). Firing costs and capital structure decisions. The Journal of
Finance, 71(5), 2239-2286.
Yuliana, S., Datien, E. U. S., & Si, M. (2017). Pengaruh Debt Ratio, Sales Growth, Return
On Equity, Earning Per Share, Dividend Payout Ratio, Current Ratio Terhadap Nilai
Perusahaan: Studi Kasus Index Saham Syariah Indonesia Tahun 2011-2015 (Doctoral
dissertation, IAIN Surakarta).
Zainudin, E. F., & Hashim, H. A. (2016). Detecting fraudulent financial reporting using
financial ratio. Journal of Financial Reporting and Accounting, 14(2), 266-278.
Zheng, J. (2018). Determinants of Corporate Debt Financing.

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