Valuation multiples[ edit ] A valuation multiple  is simply an expression of market value of an asset relative to a key statistic that is assumed to relate to that value. To be useful, that statistic — whether earningscash flow or some other measure — must bear a logical relationship to the market value observed; to be seen, in fact, as the driver of that market value. These multiples reveal the rating of a business independently of its capital structure, and are of particular interest in mergers, acquisitions and transactions on private companies.
Types of Earnings Management and Manipulation Earnings manipulation is usually not the result of an intentional fraud, but the culmination of a series of aggressive interpretations of the accounting rules and aggressive operating activities.
The end result is misstatement of the financial results perpetrated by people that had previously been considered honest and may not have realized the severity of their actions until it was too late.
The typical case of earnings manipulation begins with a track record of success.
The company or division has posted significant sales and earnings growth over recent years. Their stock price trades at a high price earnings multiple as the market rewards its stellar growth.
Unfortunately, it is becoming more difficult for the company to maintain the sales and earnings growth that analysts have grown to expect. Sales are behind target this quarter, so management runs special incentives for its sales force to accelerate sales and uses overtime to ship out its products.
It works and the firm meets expectations. The next quarter, the analyst expectations are higher. However, sales still have not picked up to the level required, so the firm provides additional incentives to its sales force, uses overtime to boost shipments but now has additional expenses to contend with incentives and overtimeso it does not fully accrue all its consulting expenses.
This time the operating tactics are not enough, so management pressures the CFO to make the numbers. The CFO is aggressive in the interpretation of installment sales and expense accruals, and the company again meets expectations.
As the fourth quarter comes around, sales still are not at expectations. The CFO creates sales and under-accrues expenses all to meet expectations. The company has gone from aggressive operating practices to financial fraud. Earnings management is the acceleration or deferral of expenses or revenue through operating or accounting practices with the objective to produce consistent growth in earnings.
These earnings may not reflect the underlying economics of the enterprise for the time-period. Some of the principle means of managing earnings are "cookie jar" reserves, capitalization practices, "big bath losses", altering the timing of operations to speed recognition of revenues, aggressive merger and acquisition practices and revenue recognition practices.
In general, the practice of earnings management leads to pulling operating profits from subsequent periods creating even greater pressure on financial managers to create earnings in those following periods.
The management of earnings can then lead to manipulation and misstatement taking management down the path from questionable ethical practices to blatant fraud. Some of the techniques used to manage and manipulate earnings are discussed below: For example, if a firm hires a consultant to perform a particular activity, it should reflect the expense related to that activity in the period in which it is incurred, not when the bill is paid or invoice received.
In many cases, the accrual of expenses, or reserves in particular industries such as insurance and banking, are based on estimates. As such, the estimates have varying degrees of accuracy. During times of strong earnings, the firm establishes additional expense accruals and subsequently reduces the liability to generate earnings when needed in the future - pulling a "cookie from the jar".
Capitalization practices - intangible assets, software capitalization, research and development Incompanies were allowed to capitalize the costs of internally developed software and amortize it over the useful life, generally three to five years.
Capitalization is to represent the development costs. The capitalization process of companies has the potential for manipulation because these assets are often intangible and based on judgement. A firm may allocate more expenses to a project that can be capitalized to reduce current operating expenses.
Many believe and anecdotal evidence has shown that analysts overlook non-recurring charges because they are not part of the firms ongoing operations or operating income.
Typical non-recurring charges include writing down assets, discontinuance of an operating division or product line and establishing restructuring reserves.
As discussed previously, firms practicing earnings management deplete the economic earnings from future periods.(1) Sales price per ton is defined as total coal sales divided by total tons sold. (2) For definitions of Segment Adjusted EBITDA Expense per ton and Segment Adjusted EBITDA and related reconciliations to comparable GAAP financial measures, please see the end of this release.
Investing in unprofitable companies is generally a high-risk, high-reward proposition, but one that many investors seem willing to make. For them, the possibility of stumbling upon a small biotech.
Simply put, EV is the sum of a company's market cap and its net debt. To compute the EV, first calculate the company's market cap, add total debt (including long- and short-term debt reported in. Dividing EBITDA by the amount of required debt payments yields a EBITDA can also be used to compare companies against each other and against industry averages.
rather than using EBITDA to.
1 Hour Ago. CAPE TOWN, Nov Equatorial Guinea has ordered energy companies to stop doing business with oil and gas service firm Subsea 7 because the firm failed to comply with laws aimed at. The earnings yield is a way of looking at the income generated by a company in a similar way to the yield you’d get from a bond or the dividend yield of a share.
Start studying FinanceChapter Learn vocabulary, terms, and more with flashcards, games, and other study tools. We want to analyze financial statements so as to compare different companies and their performance _____ help us analyze whether a company is moving toward financial stress or is using debt to benefit the company and. Using Debt-To-Equity Ratios To Identify Potential Solar Downturn Survivors. I am updating my chart of debt-to-equity ratios for solar companies. (I will provided some highlights from key. Featured. McKinsey Global Institute Our mission is to help leaders in multiple sectors develop a deeper understanding of the global economy.
It tells you what percentage return the company is making, on the basis of its after-tax income and the price you pay for it. For.