Financial Analysis - residual earnings Essay Example | Topics and Well Written Essays - 250 words

Financial Analysis - residual earnings - Essay Example Pinto (2010) explains that one of the drivers of residual earnings is book value growth. Residual earnings depend on the growth in the value of the invested assets in the business. When investment is made in a business, the invested resources then start to produce earnings. With a well growing business, the investments will produce more earnings which then lead to the increased book value of the capital beyond the expected returns (Wahlen, et al 2010). This then delivers the residual earnings. Return on common equity also is a driver of residual returns. The general returns that a business earns excess of the shareholders equity is what defines the residual earnings (Easton, 2009). When these returns therefore exceed the returns on capital that the business set to achieve, it delivers residual earnings. However, critical analysis shows that return on capital is the same as residual earnings. Diebold, F. X., Doherty, N. A., & Herring, R. 2012. The known, the unknown, and the unknowable in financial risk management: Measurement and theory advancing practice. Princeton, N.J: Princeton University