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Centers & Initiatives

Financial Analysis Lab

The Georgia Tech Financial Analysis Lab conducts unbiased research on issues of financial reporting and analysis. Unbiased information is vital to effective investment decision-making. Accordingly, we think that independent research organizations, such as our own, have an important role to play in providing information to market participants.

Because our lab is housed within a university, all of our research reports have an educational quality, as they are designed to impart knowledge and understanding to those who read them. Our focus is on issues that we believe will be of interest to a large segment of stock market participants. Depending on the issue, we may focus our attention on individual companies, groups of companies, or on large segments of the market at large.

A recurring theme in our work is the identification of reporting practices that give investors a misleading signal, whether positive or negative, of corporate earning power. We define earning power as the ability to generate a sustainable stream of earnings that is backed by cash flow. Accordingly, our research may look into reporting practices that affect either earnings or cash flow, or both. At times our research may look at stock prices generally, though from a fundamental and not technical point of view.


March, 2017

Anecdotal data suggest that firms are using the placement order of their financial statements to provide emphasis and affect perception about financial performance and position.  Our objective is to see if we can identify systematic differences across firms that would help explain the financial statement placement order employed. We identify a sample of 400 public companies drawn from four different revenue quartiles.  In addition to financial data for each firm, we identify the sector in which each firm operates and the firm’s auditor. 

We find that the balance sheet is much more likely to be the lead-in financial statement.  Of the 400 companies in the sample, 272 (68.00%) present the balance sheet first while 127 (31.75%) present the statement of operations (income statement) first.  In examining the factors that may drive the lead-in financial statement decision, we note that firms leading with the statement of operations are larger based on revenue and total assets.  Further, they are more profitable, reporting a higher return on equity and higher net margin. Their asset turnover and operating cash margin are also higher.  Finally, likely attesting to their larger size and debt service capacity, the firms leading with the statement of operations also report higher financial leverage. 

The results observed in this study, that is, the prevalence of the balance sheet as the lead-in financial statement, are also generally supported by the results observed for the ten industry sectors examined.  Materials and Utilities are exceptions.  Clients of Big 4 auditors also tend to report the balance sheet first. Here again, however, because their clients are likely larger in size than firms in the sample as a whole, the prevalence of the balance sheet as the lead-in financial statement is not as strong as observed in the sample as a whole.  However, for non-Big 4 auditors, firms that likely audit smaller companies than the Big 4 auditors, the balance sheet is reported as the lead financial statement more frequently than in the sample as a whole.  These results are relevant to CFOs, auditors, analysts and investors.

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Quarter 3, 2016
Free Cash Margin Index:
Recession Lows

0.99%, 3.45% (Dec. 2000, Dec. 2008)


4.96% (Sep. 2016)

Recent High

6.88% (Dec. 2009)

January 2017

Median free cash margin increased to 4.96% for the twelve months ended September 2016, compared with 4.64% for the twelve months ended June 2016 and 3.74% in September 2015. The metric now sits above the upper end of its historical range of between 3.00% and 4.50%. Helping to drive free cash margin higher, operating cushion, or operating profit before depreciation, improved to 13.70% during the twelve months ended September 2016 from 13.64% in 2015. Declines in income taxes and capital expenditures also helped to improve free cash margin.

A notable development during the most recent reporting period was the continued increase in median revenues. The metric increased to $1,052.29 million during the twelve months ended September 2016, up 5.2% from $1,000.30 in 2015, and is nearing its all-time high of $1,066.79 recorded in June 2014.

The cash cycle increased to 50.26 days in the September 2016 reporting period, up from 48.88 days in 2015, driven higher by increases in accounts receivable days and inventory days, offset partially by an increase in accounts payable days. Capital expenditures as a percent of revenue declined slightly, to 3.96% in the period ended September 2016 from 3.97% in 2015. Overall, cash flow data for the twelve months ending with the third quarter of 2016 imply an economy that is improving, but in measured steps.

Looking at individual industries for the reporting period ending September 2016, free cash margin was stable in five industry groups, higher in twelve, and lower in three.

Data for this research were provided by S&P Capital IQ’s Compustat database.

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Earnings Quality: Reports on Individual Companies and Industries

In these reports we examine one or more dimensions of earnings quality: the cash flow support of earnings, the sustainability of earnings, or the quality of the balance sheet.


Excel Spreadsheets of Cash Flow Data and Graphs by Industry

Quarter 3, 2016