Investigating Sustainable Earnings Extraction from Profit Margin

In order to make decisions, users of financial information need to pay attention to the earnings quality in addition to the quantitative of earnings in the income statement. In examining the quality of earnings, it is important to examine the sustainability of earnings and the distinction between stable and unstable earnings. Revenues and expenses are fundamentally proportional to one another Incomes and expenses are basically related to each but are likely to be disproportionally affected by transitory items or economic shocks; Therefore, the separation of the unstable part resulting from transitory items and economic shocks from the stable part of earning has often been the focus of researchers. This research proposes a new measure of sustainable earnings based on deviations from normal profit margins, one of the financial ratios. Based on deviations from normal profit margins and based on the firm-specific and the industry-based, the core (stable) and non-core (unstable) components of earning have been separated and the coefficients of these components have been estimated in regression models. The studied sample is the panel data related to the Tehran Stock Exchange (TSE) companies between 2011- 2021. The results, based on both firm-specific and industry-based, indicate that for all three profit measures the persistence of core earnings, measured by α1, is significantly larger than that of non-core earnings, measured by α2. In addition, there is a positive and significant relationship between the persistence of core earnings and the intensity of core earnings (ICE), which is extracted as an earnings quality measure.