On The Financial Characteristics Of Firms That Have Achieved The Highest Levels Of Accuracy In Earnings Predictability

The value of a company is said to be a function of the future earnings or cash flows the company will produce discounted at a rate commensurate with risks associated with those cash flows. The subject of earnings predictability or the lack of reliable forecasts has been of interest to academic researchers and financial managers for years. Value Line publishes weekly, a ranking of the reliability of earnings predictions for every firm in their database. The higher the Value Line ranking for earnings predictability, the more likely they would recommend it as a safe investment. Earnings predictability is then, simply one of their important measures of potential value and safety.  The purpose of this study is to provide a financial analysis of those firms described by Value Line as having the most reliable levels of earnings predictability in their database. Specifically, the analysis will test for significant differences in the financial profiles of those firms that achieved the highest Value Line ratings for earnings predictability, and companies selected at random from the same industries.  A unique financial profile is estab­lished for the highest rated group, and it is suggested that the profile may be used to identify firms that because of their financial nature are capable of producing the most accurate sales forecasts, and earnings predictability. As in previous studies of this nature Multiple Discriminant Analysis is used.&nbsp

A Financial Profile of Those Firms That Maintained or Increased Market Value during a Period of Economic Recession and Financial Market Turmoil

Most companies will lose value during any period of recession, whether that value is measured by equity prices, price earnings multiples, or the present value of invested capital. First, there is usually a diminished flow of revenue and cash to meet obligations and avoid potential bankruptcy. Secondly, in recessions and economic slowdowns both consumers and businesses try to conserve and retain sufficient liquid assets to meet their current obligations. The attempts to conserve cash often contribute to furthering a recession. For example, banks may stop or at least slow the rate of lending. Consumers sometimes slow the speed at which they repay loans. Such actions increase the cost of capital and in turn will slow capital investment and production resulting in lower values for most firms. However, there were firms that in the recession beginning in December 2007 and lasting until June 2009 that maintained their value and indeed some actually increased in value. This raises an obvious question. Who were these companies, and how were they different? The purpose of this study was to provide a financial analysis of those firms described by Value Line as having maintained or increased their value during this period. Specifically, the analysis tested for significant differences in the financial profiles of that group and companies selected at random, but from the same industries as the first group. A unique financial profile is established for the firms that maintained or increased their value and it is suggested that the profile may be used to identify firms that will maintain or increase value in future periods of economic downturn