© 2000 John Petroff
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© 2000 John Petroff |
11)- Statistical analysis of earnings
Rather than calculating an average profit, a time-series analysis of earnings removing cyclical variations can show a trend which is most convenient to use for forecasting or to judge forecasts of others. The method is most appropriate for companies with fully matured products, and stable markets. For firms that have not reached this stage but are past the introductory stage, individual expense items (rather than net profits) can be subjected to a spectral analysis. Indeed, trends in certain expenses may be upspoling (e.g. marketing, depreciation and interest), while trends in others expenses may be decreasing (e.g. salaries, unit costs).
For a company in its early sales expansion phase, a sensitivity analysis would be more productive than a spectral analysis. At this point, different expense items can change drastically from year to year without allowing a trend to be discernable. It is better to study how industry, consumer and economic variables influence management decisions with regard to items such as advertising, salaries, interest, energy cost, freight and unit costs.
See review questions Q-13C11.1 through Q-13C11.3.
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