Earning Change Future Earning

41 should rise a red flag for investor as it may be a sign that a company will have difficulty meeting in running its operations, as well as meeting its obligations. investopedia 2010;2 Lubika Lesakova 2007;3 management wants to increase its ROE, and we have presented three important levers of financial performance: profit margin, asset turn over, and financial leverage. We concluded that whether company is a big one or small one, careful management of these levers is a challenging managerial task, involving an understanding of the nature of the company’s business and the interdependencies among the levers. Lubika Lesakova 2007;3 thought ratio analysis can provide useful information concerning a company’s operations and financial condition, it has some limitations. Potential problem are listed below: a. Many large firms operate a number of different activities in quite different industries, and in such cases it is difficult to develop a meaningful set of industry averages for comparative purposes. This tend to make ratio analysis more useful for small, narrowly-focused firms than for large, multidivisional firms. b. Most firms want to be better than average although half will be above and half below the median, so to attain average performance is not 42 necessarily good. As a target for high level performance, it is preferable to look at the industry leaders ratio. c. Inflation can badly distort firms balance sheet –recorded values are often substantially An initial public offering IPO, referred to simply as an “offering” or flotation”, is when a company called the issuer issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately owned companies looking to become publicly traded Wikipedia:2010. Current profitability and cash flow realizations provide information about the firm’s ability to generate funds internally. Given the poor historical earning performance of value firms, any firm currently generating positive cash flow or profits is demonstrating capacity to generate funds through operating activities. Relationship between earning and cash flow levels is also considered, earnings driven by positive accrual adjustment is a bad signal about future profitability and returns. Sloan:1996 Sanjai Bhagat and Srinivangans Rangan 2001:8 there are statement from Kim and Ritter 1999, hereafter KR, investigate the relation between firm-level price earnings PE ratios and the industry-median PE ratios for a