Historical Key Ratios Influence on Companies Future Profitability

Christian Rosted Gettermann & William Martin Engel Møller

Student thesis: Master thesis

Abstract

This paper contributes to the theory of financial statement analysis. Theory suggests that applying historical information is an important element in defining the future expectations of a company’s profitability. Earlier research has tried to predict future expectations of a company’s profitability across different industries and companies by using historical information. Furthermore, earlier research has shown that by implementing an industry-adjusted component the possibility of predicting a company’s future profitability increases. However, previous research has yet to implement a ratio based on a company’s balance sheet for segregating and comparing the variation of profitability across industries. This paper implements the ratio asset intensity to compartmentalise publicly traded companies into quartiles of industries with similar asset intensity, in order to recognise how historical key ratios of the company, industry and market affects the company’s future profitability. Firstly, the paper concludes that a company’s future expected profitability is more affected by historical key ratios of its industry rather than the company itself or the market. Furthermore, after implementing the asset intensity ratio the paper emphasises the different weighing of historical information from either the company, the industry or the market, that needs to be taken into account. The paper concludes that the weighing varies and needs to be altered across industries with different asset intensity when trying to predict the expected future profitability of a company. Furthermore, the paper concludes, that when trying to apply the asset intensity segregation onto a pre-determined industry, the weighing of historical information becomes more arbitrary across industries.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2021
Number of pages144
SupervisorsJeppe Christoffersen