Merrill’s director of equity research, Deepak Raj, told analysts in a memo they should be employing measures that go beyond pro forma earnings and consider the US Financial Accounting Standards Board’s guidelines when formulating earnings estimates and ratings opinions.
Some lawmakers and investors have said that analysts rely too heavily on pro forma results, which often overstate a company’s profitability.
In addition to industry-specific criteria already being used, the company suggests researchers focus on cash flows compared to net income, return on capital, return on asset measures, and receivables and inventory turnover.
Raj also warned analysts that some companies may have ‘significant pension liabilities, as well as off-balance sheet financing and the potential impact of mark-to-market accounting’.
Merrill Lynch expects to have its new evaluating framework in place by its second quarter.
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