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Profitability, Growth, and Different Flow Ratio Concepts: Implications for Failing Firms

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  • Erkki K. Laitinen

    ()
    (Faculty of Business Studies, University of Vaasa)

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    Abstract

    The objective is to develop a mathematical model of the firm to show the relationship between profitability, growth, and financial flow concepts especially under conditions for failing firms. It is assumed that revenue flows are generated by periodic expenditures growing at a steady rate. These revenue flows are described in terms of profitability (internal rate of return), growth, and time lag between invested expenditure and generated revenue flow. Three kinds of financial flow concepts are drawn: revenue-expenditure flow (quick flow), revenue-expense flow (earnings), and cash flow. Earnings are drawn for three depreciation theories: proportional, rate of return, and compound interest depreciation. For each concept, flow ratios are drawn and compared with each other. Theoretical results are illustrated by empirical data from Finnish non-failing and failing firms.

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    File URL: http://www.bapress.ca/ref/ref-2012-4/Larger%20than%20One%20Probabilities%20in%20Finance.pdf
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    Bibliographic Info

    Article provided by Better Advances Press, Canada in its journal Review of Economics & Finance.

    Volume (Year): 2 (2012)
    Issue (Month): (November)
    Pages: 112-130

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    Handle: RePEc:bap:journl:120410

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    Related research

    Keywords: Profitability; Growth; Financial Flows; Ratios; Cash flow; Steady model; Failing firms;

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    1. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
    2. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    3. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
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