Equity Analysis and valuation CHAPTER
Equity Analysis and Valuation 12 CHAPTER
Earnings persistence Recasting and Adjusting Earnings persistence is a key to effective equity analysis and valuation Analyzing earnings persistence is a main analysis objective Attributes of earnings persistence include: Stability predictability Variability Trend Earnings management Accounting methods Analyze
Earnings Persistence Recasting and Adjusting • Earnings persistence is a key to effective equity analysis and valuation • Analyzing earnings persistence is a main analysis objective • Attributes of earnings persistence include: Stability Predictability Variability Trend Earnings management Accounting methods Analyze
Earnings persistence Recasting and Adjusting Two common methods to help assess earnings persistence ☆ Recasting of income statement ☆ Adjusting of income statement
Earnings Persistence Recasting and Adjusting Two common methods to help assess earnings persistence: ❖ Recasting of income statement ❖ Adjusting of income statement
Earnings persistence Recasting and Adjusting Information for Recasting and Adjusting Income statement, including its subdivisions: Income from continuing operations Income from discontinued operations Extraordinary gains and losses Cumulative effect of changes in accounting principles Other financial statements and notes Management commentary in financial statements Management's Discussion and Analysis Other: product-mix changes, technological innovations, work stoppages, and raw material constraints
Earnings Persistence Recasting and Adjusting Information for Recasting and Adjusting ➢ Income statement, including its subdivisions: Income from continuing operations Income from discontinued operations Extraordinary gains and losses Cumulative effect of changes in accounting principles ➢ Other financial statements and notes ➢ Management commentary in financial statements ➢ Management’s Discussion and Analysis ➢ Other: product-mix changes, technological innovations, work stoppages, and raw material constraints
Earnings persistence Recasting and Adjusting Objectives of Recasting 1. Recast earnings and earnings components so that stable, normal and continuing elements comprising earnings are distinguished and separately analyzed from random, erratic, unusual and Nonrecurring elements 2. Recast elements included in current earnings that should more properly be included in the operating results of one or more prior periods Recasting and adjusting earnings also aids in determining earning power
Earnings Persistence Recasting and Adjusting Objectives of Recasting 1. Recast earnings and earnings components so that stable, normal and continuing elements comprising earnings are distinguished and separately analyzed from random, erratic, unusual and nonrecurring elements 2. Recast elements included in current earnings that should more properly be included in the operating results of one or more prior periods Recasting and adjusting earnings also aids in determining earning power