Chapter 11 Equity Analysis And ValuationEquity
Chapter 11 - Equity Analysis And Valuation
Equity Analysis and Valuation
REVIEW
Equity analysis and valuation is the focus of this chapter. This chapter extends earlier analyses to consider earnings persistence and earning power. Earnings persistence is broadly defined and includes the stability, predictability, variability, and trend in earnings.
We also consider earnings management as a determinant of persistence. Earning power refers to the ability of the core operations of a company to operate profitably. Our valuation analysis emphasizes earnings and other accounting measures for computing company value. Earnings forecasting considers earning power, estimation techniques, and monitoring mechanisms for analysis. This chapter describes several useful tools for equity analysis and valuation. We describe recasting and adjustment of financial statements. We also distinguish between recurring and nonrecurring, operating and nonoperating, and extraordinary and nonextraordinary earnings components. Throughout the chapter we emphasize the application of earnings-based analysis with several illustrations.
11-1
Chapter 11 - Equity Analysis And Valuation
OUTLINE
•
Earnings Persistence
Recasting and Adjusting Earnings
Determinants of Earnings Persistence
Persistent and Transitory Items in Earnings
•
Earnings-Based Equity Valuation
Relation between Stock Prices and Accounting Data
Fundamental Valuation Multiples
Illustration of Earnings-Based Valuation
•
Earning Power and Forecasting for Valuation
Earning Power
Earnings Forecasting
Interim Reports for Monitoring and Revising Earnings Estimates
11-2
Chapter 11 - Equity Analysis And Valuation
ANALYSIS OBJECTIVES
•
Analyze earnings persistence, its determinants and its relevance for earnings forecasting. •
Explain recasting and adjusting of earnings and earnings components for analysis.
•
Describe earnings-based equity valuation and its relevance for financial analysis.
•
Analyze earning power and its
Equity Analysis and Valuation
REVIEW
Equity analysis and valuation is the focus of this chapter. This chapter extends earlier analyses to consider earnings persistence and earning power. Earnings persistence is broadly defined and includes the stability, predictability, variability, and trend in earnings.
We also consider earnings management as a determinant of persistence. Earning power refers to the ability of the core operations of a company to operate profitably. Our valuation analysis emphasizes earnings and other accounting measures for computing company value. Earnings forecasting considers earning power, estimation techniques, and monitoring mechanisms for analysis. This chapter describes several useful tools for equity analysis and valuation. We describe recasting and adjustment of financial statements. We also distinguish between recurring and nonrecurring, operating and nonoperating, and extraordinary and nonextraordinary earnings components. Throughout the chapter we emphasize the application of earnings-based analysis with several illustrations.
11-1
Chapter 11 - Equity Analysis And Valuation
OUTLINE
•
Earnings Persistence
Recasting and Adjusting Earnings
Determinants of Earnings Persistence
Persistent and Transitory Items in Earnings
•
Earnings-Based Equity Valuation
Relation between Stock Prices and Accounting Data
Fundamental Valuation Multiples
Illustration of Earnings-Based Valuation
•
Earning Power and Forecasting for Valuation
Earning Power
Earnings Forecasting
Interim Reports for Monitoring and Revising Earnings Estimates
11-2
Chapter 11 - Equity Analysis And Valuation
ANALYSIS OBJECTIVES
•
Analyze earnings persistence, its determinants and its relevance for earnings forecasting. •
Explain recasting and adjusting of earnings and earnings components for analysis.
•
Describe earnings-based equity valuation and its relevance for financial analysis.
•
Analyze earning power and its