Explore BrainMass

Does net income matter to stock price?

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

George Smith owns a lot of investments in common stock. He says that he does not care what a company's net income is because the stock price tells him everything he needs to know.

How would you respond to George?

© BrainMass Inc. brainmass.com October 25, 2018, 8:58 am ad1c9bdddf

Solution Preview


Your comment that stock price is all you have to know has a great deal of wisdom. After all, the stock price is what you pay and what you receive upon selling. So, the net income has no direct connection to your cash flow from buying and selling common stock (Wiki.fool.com, 2013). That is not quite the same as saying that net income is not relevant at all. It is one of many ingredients that impact stock price, although the correspondence with stock price can be moderate given the other influences.

Stock price results from buyers and sellers both estimating the future cash flows and negotiating a settlement price. They obviously have ...

Solution Summary

Your discussion is 369 words an two references and explains why George does not find net income all that relevant and how he might be encouraged to consider it as an important piece of data.

See Also This Related BrainMass Solution

Analysis of Financial Statements and Efficiency

1) Draw a scratch-work Balance Sheet for a company with Assets = 100, and describe the leverage of a company where you decide how much leverage the company has. (For example, 90% borrowing, 10% equity---you choose the leverage.)
If your company makes three (dollars) on the assets of 100 ($3 on $100, etc.); and has to pay out 2% on its liabilities, please tell me what the return on equity is. (Use your equity figure for "average equity".).

2) Give me several reasons why a market might not be "efficient". Are markets perfectly efficient? Why or why not?

3) Why is the analysis that a creditor would do different than one that a stock investor might do?

4) Accounting has traditionally relied on assets being valued at historical cost. More and more, though, "fair value accounting" has come to be accepted. In what ways is fair value accounting an improvement on the historical cost method? What are the pitfalls of employing fair value accounting?

5) Considering DR expenses, CR revenues, and the various asset and liability/equity accounts, discuss three ways that a company might try to boost its earnings by treating expenses or revenues as balance sheet items(or vice versa).

6) Whose responsibility is it to produce the financial reports for a company? What does the auditor actually do? Does the controller have any involvement in certifying to the accuracy of the 10-K? What happens if the controller does not agree with the financials? Do auditors attest to the soundness of internal controls of a company?

7) Why is the distinction between operating income and non-operating income important? What is Comprehensive Income? What is Other Comprehensive Income?

8) If a company constantly reports the same kind of extraordinary items on its financial statement, what impression should that give to the user of the company's financial statements?

9) Why is it important to account for Employee Stock Option programs? What do we call it when we try to figure out what earnings per share would be if all the stock options were exercised?

10) Why are there deferred income taxes? If a company has a deferred tax liability on its books, what does that mean happened? Can a company have both a deferred tax asset and a deferred tax liability?

View Full Posting Details