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PE also grows when both the stock price and the earnings per share increase, however, the increase of stock price must be
sharper than the increase in the earnings per share. Another scenario of increasing PE take place, when stock price remain
stable despite there is a decrease in the earnings per share. The price earnings ratio does not change when there is a balance
between the growth of the stock price and the earnings per share. Marian Vorek :2009
e. Company Failure or Bankruptcy
Bankrupt firms has indicated their worse financial position for a considerable time before they actually went
bankrupt It is widely believed that profitability and liquidity ratios can predict bankruptcy to a certain extent I also proved
that the Japanese bankrupt firms had indicated their worse financial position for a considerable time before they actually
went bankrupt Cindy Yoshiko Shirata: 1998
Failure is defined as the inability of a firm to pay its financial obligations as they mature. Operationally, a firm is
said to have failed when any of the following events have occurred: bankruptcy, bond default, an overdrawn bank
account, or nonpayment of a preferred stock dividend.
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A financial ratio is a quotient of two numbers, where both numbers consist of financial statement items. A third term,
predictive ability, also requires explanation but cannot be defined briefly. The emphasis upon financial ratios does not
imply that ratios are the only predictors of failure. The primary concern is not with predictors of failure per se but rather with
financial ratios as predictors of important events-one of which is failure of the firm. Further, the primary concern is not with the
ratios as a form of presenting financial-statement data but rather with the underlying predictive ability of the financial statements
themselves. The ultimate motivation is to provide an empirical verification of the usefulness i.e., the predictive ability of
accounting data i.e., financial statements William H. Beaver : 1966
The next task was to identify those firms in Moodys that had failed during the time period being studied 1954 to 1964,
inclusive. In the front of Moodys there appears a list of firms- firms on whom Moodys has formerly reported but no longer
does so. There are many reasons why a firm; may be dropped- name change, merger, liquidation, lack of public interest, and,
most importantly, failure. The list of several thousand names was condensed into a list of firms that had failed.
