Investments, tenth edition

     1.   The primary focus of the security analyst should be the firm’s real economic earnings rather than 

its reported earnings. Accounting earnings as reported in financial statements can be a biased esti-

mate of real economic earnings, although empirical studies reveal that reported earnings convey 

considerable information concerning a firm’s prospects.  

    2.   A firm’s ROE is a key determinant of the growth rate of its earnings. ROE is affected profoundly by 

the firm’s degree of financial leverage. An increase in a firm’s debt-to-equity ratio will raise its ROE 

and hence its growth rate only if the interest rate on the debt is less than the firm’s return on assets.