Measuring and Forecasting Earnings

Measuring Earnings:

a.     Internal Information: Relating to enterprise

b.     External Information: Out side the company

Financial Indicators:-

Analyze the financial position of the company.

Tools:

a. Income statement

It gives past records of the firm that forms a base for making predictions of the firm.

b.  Balance sheet

It shows the assets and liabilities of a firm along with shareholder  s equity

c. Statement of Cash flows

It shows how a company's cash balance changed from one year to the next

d. Ratio Analysis

It makes intra firm and inter firm comparisons.

1.     Profitability Ratios: a. Return on Investment:

Earnings before interest and taxes / Total Assets

b. Leverage Ratios:

Debt Equity Ratio=Total Debt  / Equity

c. ROE Analysis

Non Financial Indicators:

1.     Business of the company

2.     Top Management

3.     Product range

4.       Diversification

5.     Foreign collaboration

6.       Availability of cost of inputs

7.     Research and development

8.     Governmental regulations

9.     Pattern of shareholding and listing

Forecasting Earnings

1.     Identification of variables:

a. Operations and Earnings

Operating cycle of a firm starts with cash converted into inventory

ROI= EBIT / Investment

b. Financing& Earnings

Debt financing: Provide leverage to common share holders

Equity financing: Equal shares

2. Selecting a Forecasting method:

a. Traditional method

Earnings model: Analysis EAt & EBT

Market share: Consists of tracking historical record and net income

Projected Financial statements: Projection of earnings

b. Modern methods:

¸   Regression analysis

It s the measure of the average relationship between two or more variable in terms of the original units of the data

¸ Correlation analysis

Its to reduce the range of uncertainty of our prediction

¸   Trend analysis

It refers to collecting information and attempting to spot a pattern

¸   Decision trees

It used to forecast earnings as security values.