Volume 7, No. 12

 

What's Happening To The Quality Of Assets? Part II:  Analysts and investors constantly fret over the "quality of earnings" - and there has been much to fret about in 1998. Earnings analysis is the mainstay of the analytical and investing community. But to get a head start on earnings analysis, analysts should ask themselves: where do earnings come from? Assets, of course - so some review of asset quality should be part of an analyst's rigor. Examination of the Dow Jones Industrials shows a distinct difference in the composition of assets at the beginning of the 1990's compared to what's now capitalized on balance sheets. On balance, there is a greater presence of "soft" assets on balance sheets - the kind of assets that are not used to make a product or provide a service, but provide some future benefits anyway. That doesn't mean that future earnings are bound to be of lower quality than in the past, but it should convince analysts to pay closer scrutiny to corporate balance sheets.

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