What does the phrase sustainable earnings mean What types of

What does the phrase sustainable earnings mean? What types of earnings are not sustainable? What are abnormal earnings? Briefly describe the key features of the abnormal earnings approach to valuation.

Solution

Phrase sustainable earnings meaning

The sustainable earning are those reported income that are most likely to be earned by the company after giving effect of tax of all non recurring expenses , loss and gains that are unlikely to be accounted every year . Most likely the sustainable income is derived from the operational income sources .

Types of earnings that are not sustainable

Abnormal earnings

Abnormal earnings connotation means the extra earning / under performance over the expected return projected . The abnormal earning capacity of the firm /company depends on the managment decision making .

Positive Abnormal earning = Firm current earning > Cost of Capital

Negative Abnormal earning = Firm current earning < Cost of Capital

The key features of the abnormal earnings approach to valuation.