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Pascal edited introduction.tex
almost 8 years ago
Commit id: cf2f27c72b77ba6ca29f6023a4009b7446476273
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$B_{t}=E_{t}-RB_{t-1}$
earnings are a pure accounting measure that can be manipulated because it incorporates non-cash items of the income statement. Another drawback often mentioned by practitioners is that profitability measures based on earnings depend on a firm's gearing, defined as the amount of debt relative to equity. A company can have an attractive Return on Equity (hereafter \textit{ROE}) despite having an unattractive Return on Invested Capital (hereafter \textit{ROIC}). More importantly, a company using financial leverage to enhance its \textit{ROE} actually makes it more volatile often at the expense of its financial strength (measured by the health of the balance sheet).
