The Usefulness of Alternative Measures of Profit

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The purpose of the following report is to examine the relative usefulness of alternative measures of profit (or income) to equity investor and assess the potential contribution of key valuation models. The analysis will include a theoretical research part, containing a synthesis of equity valuation techniques and alternative profit measures. And also a practical part that should illustrates the potential differences in the information conveyed to investors by different profit measures of a NASDAQ company. Profit measures and valuation models represent the central focus of decision making, therefore it is an important concept to determine and investigate. Managers use valuation techniques and profit measures to monitor and asses the performance of the business relative to competitors and to evaluate financial policies or new investments. Securities analyst uses them to rate companies and generate a strategy that they may recommend to clients. Bankers may use valuation methods with the purpose of deciding whether to extend or terminate a line of credit for a corporation. Investment banker use valuation techniques in order to value and analyse possible buyouts, mergers or acquisitions. Therefore, it is not surprisingly that there is a great demand for a comprehensive and efficient earnings measurement. Ratio profit measurements and valuation models represent an important topic for the financial literature. Researchers and analysts have developed a variety of equity valuation techniques that may be used by investors in formulating a financial strategy. However, in practice many investors find it difficult to distinguish among different models that may provide unlike ... ... middle of paper ... ...n example of a company that does use non-GAAP measures in a slightly manipulate manner. When analysing net income per share using GAAP figures the result of $ (0.62) describes an image dissimilar from the non-GAAP measure of $ 0.87 (Appendix 2). Valuation represents the process of determining the value of an asset as expressed in monetary sums. Investors may use a variety of valuation methods depending on operating industry, size (market capitalization) and characteristics (start-up or a mature) of the firm. Valuation is not an objective exercise, and any change in profit measures may bring a change into the value of the company. Although there are many models available, for most investors, a combination of these different business valuation methods and profit measures will be essential in an efficient analysis.
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