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Business and Finance

Factors Determining Profitability in the Market

In the article, the author is trying to convey factors or approaches which can be used determine the profit earned from any market. In order to explain the points, the author used fundamental argument or analysis and accounting techniques of deriving profit in business. It is illustrated that the profit being earned is determined by changes which occur in a specific market. For instance, in the stock market, more profit is earned when the something happens abruptly which causes the price of shares to rise (Bartram and Grinblatt). However, when a price of shares increases the deviation point is marked and based on the deviation point the profit earn is calculated. This is applicable across all markets, and the change or deviation is what allows a company or business to generate profit.

However, the author supported the argument using different approaches so that it can be understood. First, the author used different fundamental analysis approach to illustrate the how the profit is calculated. The fundamental analysis is based on the opinion that stocks have an actual value and investors can make a good profit from the stock when a certain deviation happens in the market that makes the value fair. The author further stated that the deviation point moves from the convergence to a fair value and the different between the convergence and the fair value is the profit earn from the market (Bartram and Grinblatt 15).

It means that profit is realized when a change occur in the market and such change should be the increase of the value of the share. And if the value of share decreases the profit is not earn and it can be a lost to shareholders or the company in the case of profit and loss account. It is also noted that the profit earn is based on the growth rate of both long term and short term cash flows. It means that when an organization improves its cash flow a profit is earn in the sense that the cash increases as well. It is illustrated that profit is based on It is stated that profit is earn when certain anomalies happen within the market segment.

Table 1: Summary Statistics by Mispricing Signal Quintiles

All Correlation Q1 (Overvalued) Q2 Q3 Q4 Q5 (Undervalued)
Mispricing Signal (M ) 0.9640 1.000 -2.0253 -0.2427 0.3996 1.3042 5.3848
Market Capitalization 2,847.7 -0.068 3,541.8 5,941.9 3,006.4 1,365.7 381.3
Book/Market 0.5774 0.291 0.4071 0.4198 0.5054 0.6361 0.9186
Beta 0.9280 -0.139 1.0259 1.0018 0.9764 0.9102 0.7227
Accruals 0.9507 -0.010 1.8169 0.8555 0.6942 0.6995 0.7328
SUE 0.0140 0.026 0.0275 0.0021 0.0093 0.0230 0.0082
Gross Profitability 0.3685 0.042 0.3011 0.3811 0.3907 0.3875 0.3819
Earnings Yield 0.0210 0.159 -0.0537 0.0271 0.0387 0.0439 0.0488
Prior Month Return t 2.0692 -0.029 3.5124 2.7653 1.9508 1.3282 0.7908
Return from Month t-1 to t-11 23.41 -0.068 38.741 32.365 21.825 14.64 9.670
Return from Month t-12 to t-59 99.43 -0.048 109.19 114.73 107.47 92.44 73.45

In table 1 above, the important overvalued and undervalued figure on the table since, the figures are used to calculate the mispricing. However, the more important figures on this table are return from Month and Prior Month Return. Based on the illustration provided from the fundamental analysis or point of view, profit earn based on the table can be derived when the prior month return is subtracted from the return from the month. The prediction or undervalue or overvalue is used as a market indicators to predict the future performance of stocks in the market. Through prediction investors can decide either to invest or not for future earnings or profitability.

The table is shows the effect of misprice on the gross profitability, accrual, market capitalization and in the stock market. It illustrates that overprice and underpriced of market values can undermine the profit which makes it difficult to give a true value of the profit earned. The author narrated that the misprice is based on the prediction of the future return and when the overpriced quintile have a higher accruals, it means that the gross profit shall be lower or less. The table also shows that the gross profitability, book to market, earnings to price accruals and past returns lowers the future average earnings. It means that the mispricing (M), controls the return from the market. The mispricing is applied to predict the next return on certain segment of the market and high prediction can translate to a higher profitability. And therefore, the table shows what happens to various markets when mispricing is applied and the effect which mispricing has over the market and profitability as well.

The report is essential in making investment decision since it illustrates how the stock market operates. However, the investment managers can use the report to analyze the market performance to provide appropriate advice to investors especially when or how to invest on the stock market. It can also be used by investment managers predict the prices of shares and market value which can be used to advice customers or investors. The investment managers can predict prices of various stocks or the future prices of various shares in the market and influence customers to investment in order to earn more divided, or profits in the future. This is because most people who invest in the stock market usually put their investment for future earning and with such detailed report investment managers can convince customers to invest more and therefore, earning a fortune for the company.

Works Cited

Bartram, Söhnke M. and Mark Grinblatt. “Agnostic Fundamental Analysis Works.” (2017): 1-56.



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