The Relation between Earnings and Cash Measuring Factors with Predicting Future Cash Flows

Abstract

The purpose of this study is to examine the relative predictive power of earnings, cash flows from operations and two traditional measures of cash flows (i.e. earnings plus depreciation and amortisation expense, and working capital from operations) in forecasting future cash flows. Further, an investigation of the extent to which firm size influences the predictability of earnings and cash flows from operations is presented. Our sample includes 94 firms listed in Tehran Stock Exchange (TSE) for the period of 2005-2009. The results show that in small firms, earnings has more predictive power to anticipate future cash flows, as compared to cash flows from operations and traditional cash flow measures; however in large firms, cash flows from operations seems better predictor than other measures. Further, according to the findings, the predictability of all models significantly increases with the firm size.

Keywords

• Operating Cash Flow
• Earnings
• working capital from operation
• earnings plus depreciation and amortization expense