Business, Management and Accounting
7 years ago

Unprofitable companies skew index earnings growth forecasts, impacting market valuations.

The Journal of Investing
Calculating Earnings Growth Rates for Indexes That Include Unprofitable Companies
Haim A. Mozes, Hannah Rozen

Paper Summary

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The expected earnings growth rate for an index is based on the earnings growth rate of profitable companies in the index. Market multiples on an index's earnings increase with losses from unprofitable companies. During economic downturns, conventional earnings growth forecasts are higher than they should be. Losses reported by unprofitable companies are higher at market lows, leading to higher market multiples. Adjusting index earnings and growth rates for companies with losses is necessary to accurately assess an index's valuation and growth potential.