Estimating Growth in Earnings

<p>It can artificially inflate Return on Equity. (A)</p> Signup and view all the answers

<p>77% (D)</p> Signup and view all the answers

<p>Returns on new investments (A)</p> Signup and view all the answers

<p>By analyzing year-over-year changes (B)</p> Signup and view all the answers

<p>Economies of scale in investing (D)</p> Signup and view all the answers

<p>They can be lower than aggregate values (A)</p> Signup and view all the answers

<p>They are based on marginal returns and sales to capital (A)</p> Signup and view all the answers

<p>Use the higher of the two numbers as the denominator (A)</p> Signup and view all the answers

<p>The growth rate is misleading and has limited usefulness (D)</p> Signup and view all the answers

<p>102% (A)</p> Signup and view all the answers

<p>$4.113 billion (C)</p> Signup and view all the answers

<p>Forecasting expected growth in earnings per share for the next earnings report (C)</p> Signup and view all the answers

<p>25.18% (D)</p> Signup and view all the answers

<p>When earnings are negative (A)</p> Signup and view all the answers

<p>$41.20 million (D)</p> Signup and view all the answers

<p>The error in analyst forecasts is generally lower than in time series models. (A)</p> Signup and view all the answers

<p>They become slightly better forecasters in the following year. (D)</p> Signup and view all the answers

<p>Net Income - Interest income from cash (1 - t) (B)</p> Signup and view all the answers

<p>The size of the firm being analyzed. (D)</p> Signup and view all the answers

<p>Their revisions significantly impact stock prices more than others. (C)</p> Signup and view all the answers

<p>Depreciation (B)</p> Signup and view all the answers

<p>30% (C)</p> Signup and view all the answers

<p>Expected growth rate can exceed return on equity (A)</p> Signup and view all the answers

<p>Non-cash Net Income / (BV of Equity - Cash) (A)</p> Signup and view all the answers

<p>They tend to be highly correlated. (C)</p> Signup and view all the answers

<p>$11,704 million (B)</p> Signup and view all the answers

<p>Analysts improve accuracy for shorter forecast periods. (A)</p> Signup and view all the answers

<p>28% (B)</p> Signup and view all the answers

<p>$18,325 million (C)</p> Signup and view all the answers

<p>5.22% (B)</p> Signup and view all the answers

<p>Capital expenditures (D)</p> Signup and view all the answers

<p>By multiplying the investment in existing projects by the change in ROI and adding the product of new projects and their ROI. (A)</p> Signup and view all the answers

<p>The current earnings and the change in earnings. (D)</p> Signup and view all the answers

<p>Reinvestment Rate × ROI. (B)</p> Signup and view all the answers

<p>Earnings increase by $23. (B)</p> Signup and view all the answers

<p>The percentage of net income retained by the company. (B)</p> Signup and view all the answers

<p>Net Capital Expenditure and Changes in non-cash Working Capital, adjusted for Change in Debt. (C)</p> Signup and view all the answers

<p>After-tax Operating Income divided by the combined Book Values of equity and debt minus cash. (D)</p> Signup and view all the answers

<p>The company cannot sustain its current level of earnings. (D)</p> Signup and view all the answers

<p>0.7 (A)</p> Signup and view all the answers

When earnings in the starting period are negative, the growth rate cannot be calculated accurately due to division by zero.

One way to estimate growth when starting earnings are negative is to use the absolute value of the starting earnings as the denominator.

The geometric average growth rate is a more stable measure of growth over time compared to individual year-to-year growth rates.

Extrapolating past growth rates to the future can be risky because it assumes consistent growth, which may not hold true.

Analysts spend significant time forecasting future earnings per share, especially for upcoming reports.

Analysts use various methods and information to forecast earnings per share, but long-term forecasts might be less accurate.

Analysts attempt to find undervalued and overvalued stocks by analyzing and forecasting earnings per share.

Analysts use their time to uncover undervalued and overvalued securities, spending a significant portion of it on forecasting earnings per share.

A financial metric calculating the expected growth rate of earnings per share (EPS) based on retained earnings (retained earnings are the portion of net income not paid out as dividends) and the return on equity (ROE), assumed to remain constant.

The proportion of net income that a company keeps after paying dividends to shareholders.

The percentage return that a company generates on its shareholder investments, calculated as net income divided by the book value of equity.

This formula highlights the relationship between the return on capital (ROC), debt-to-equity ratio (D/E), and the after-tax cost of debt (i). It helps understand how leverage can influence the return on equity. You can use this to see if the company is earning a higher return on its investments than its borrowing costs.

A measure of how effectively a company is using its capital (both debt and equity) to generate profits.

Analyst forecasts of earnings per share tend to be closer to the actual EPS than simple time series models, but the differences are typically small.

Analysts' accuracy in forecasting earnings decreases as the forecast period lengthens.

Analysts tend to be more accurate in forecasting earnings for larger companies than for smaller companies.

Analysts tend to be more accurate in forecasting earnings at the industry level than at the company level.

Analysts' forecasts of growth tend to show strong correlation (they often agree with each other).

There's no significant evidence that analysts chosen for All-America Analyst teams are better at forecasting earnings compared to other analysts.

All-America Analysts become better forecasters after being selected for the team.

Earnings revisions made by All-America Analysts have a larger impact on stock prices compared to revisions made by other analysts.

The rate at which a company reinvests its earnings back into its operations, expressed as a percentage of net income.

A measure of how effectively a company uses its non-cash assets to generate profits, calculated by dividing net income from non-cash assets by the book value of equity minus cash.

A measure of how much a company's earnings will grow by reinvesting a portion of its profits back into the business.

Expected growth rate in earnings calculated as the reinvestment rate multiplied by the return on investment.

The rate at which a company's earnings are expected to grow based on its current profitability and reinvestment rate.

The portion of operating income that a company retains for reinvestment, after accounting for taxes.

The return generated on the total capital invested in a business, calculated by dividing operating income after taxes by total capital.

The rate of return a company generates on its new investments, reflecting the profitability of new projects and expansion plans.

The ratio showing how much revenue is generated for each dollar invested in capital, focusing on the efficiency of new investments.

The overall return on capital generated by all existing investments within the company.

The overall revenue generated from all investments divided by total invested capital, reflecting the company's efficiency across its entire capital structure.

The difference between marginal values (new investments) and aggregate values (all investments) can arise due to factors like economies of scale, expanding into new markets, or increased competition.

Net income adjusted for interest income from holding cash, reflecting earnings generated from non-cash assets only.

The expected growth rate in net income from non-cash assets. Reflects the company's ability to expand its non-cash operations and generate future earnings.

The expected growth rate in non-cash net income can surpass the return on equity if the equity reinvestment rate exceeds 100%. This indicates aggressive reinvestment into non-cash assets.

Capital expenditures, depreciation, change in working capital, and debt changes are considered to determine the net amount reinvested in non-cash assets. This reflects the company's investment decisions and financing activities.

Coca-Cola's expected growth rate in non-cash net income was calculated using the reinvestment rate and non-cash ROE, demonstrating how to estimate a company's future growth potential.

The expected growth rate in net income from non-cash assets provides a more comprehensive view of the company's growth potential, beyond just the traditional earnings growth rate.