© 2000 John Petroff
|
|
© 2000 John Petroff |
Everyone knows what earnings are, not just accountants or financial analysts. Everyone knows that earnings of a corporation are profits (i.e. the black or red numbers on the bottom line). Essentially, everyone is right.
But when it comes to making an assessment, we will find that there are literally dozens of ratios that give different angles of perception. None is giving the whole pictures. And those that are the most comprehensive, such as return on equity, we will find, are also the least precise and accurate. The reason is that what an analyst wants to know is how well the firm will perform in the future. But that is not written in black and white in the income statement, and especially not in one single number.
We first look at absolute amounts: the reported earnings and earnings per share. To be able to judge, one has to compare. Thus relative measures are better. We relate earnings to assets, to funds provided and to sales. Some of the examples presented in this chapter show that by looking at several different profit ratios, one can catch distortions and avoid drawing inappropriate conclusions. Actually, none of the earnings statistics is sufficient to assess the earnings power of the firm. For that it is necessary to look at future oriented measures that are discussed, not in this section, but in next.
See review questions Q-13B.1 and Q-13B.2.
| Previous: Distortions |
|
Next: 1- Results of operations |