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