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

Erkki K. Laitinen ()
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Erkki K. Laitinen: Faculty of Business Studies, University of Vaasa

Review of Economics & Finance, 2012, vol. 2, 112-130

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.

Keywords: Profitability; Growth; Financial Flows; Ratios; Cash flow; Steady model; Failing firms (search for similar items in EconPapers)
JEL-codes: C65 G32 G33 M41 (search for similar items in EconPapers)
Date: 2012
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