Financial Accounting Blog

Sunday, March 07, 2004

The Accounting Web reports that Merril Lynch cites some parameters to be considered when analizing corporate earnings. Furthermore, the article mentions that a high financial leverage ratio increases risk.
Four of the six measures can be calculated from historical financial statements prepared in accordance with generally accepted accounting principles (GAAP). The two remaining measures require input from Standard & Poor's. The six measures are:Pretax return on capital, Cash realization, Productive asset reinvestment, Tax rate, Common stock ranking, and Credit rating.As explained in the report, the six metrics reflect what Professor Hawkins and Merrill Lynch consider to be the six key characteristics of high quality earnings, (i.e., earnings that are earned by superior returns on total capital, close to being realized in cash, repeatable because of the level of capital invested in assets, not dependent on transitory tax rates, and not at risk because of high financial leverage and dividend obligations.)