The analysis of predictive value of earnings and cash flows on future firms' performance

Abstract

The objectives of this study were to investigate the predictive value of earnings, comprehensive income, operating cash flows, and free cash flows on future firms’ performance; future earnings and future cash flows, and to investigate the effects of financial and non-financial factors on the predictability of past financial performance. In addition, this study aimed to investigate the predictive value of combination of past financial performance. Data were collected from financial statements of listed companies on the Stock Exchange of Thailand in Agro & Food Industry and Technology Industry during the study period from 2005 to 2010. The statistical analysis was conducted using regression statistical method. The results revealed that earnings had the highest predictive value among past financial performances for future earnings prediction in both industries. The findings stated that past earnings was appropriated to predict future cash flows in Agro & Food Industry while past operating cash flow was superior to future cash flows prediction in Technology Industry. The statistical results showed that firm size and market risk significantly affected the predictability of past financial performance. The findings showed that combination of past financial performances strengthened the predictability of past financial performances. These findings would be meaningful for financial analysts to predict performances of listed companies. They could be also helpful for creditors and investors to apply for the appraisal of future performances of business entity. Furthermore, the management team could be able to employ the findings for planning and decision making. Finally, the professional organization shall concern about the usefulness of each financial performance in forecasting future performances.