Quarterly Bulletin
Profits Articles
| 2008 Q2 | How do mark-ups vary with demand?  (399k) By Clare Macallan and Miles Parker of the Bank's Structural Economic Analysis Division. The Monetary Policy Committee's (MPC's) objective is to deliver price stability. In order to achieve that goal, it is necessary to understand how inflation reacts to economic events. In the long run, inflation is determined by monetary policy. But over a shorter time horizon, one important determinant of changes in inflation is the gap between the prices charged by businesses and the costs that they face: that 'mark-up' will influence how changes in demand relative to supply feed through into consumer price inflation. The evidence presented in this article suggests that mark-ups vary positively with excess demand. That will increase the sensitivity of inflation to changes in excess demand. But it could also increase the efficacy of monetary policy, since the level of excess demand is in part determined by the level of Bank Rate set by the MPC. |
| Winter 2002 | Equity
valuation measures: what can they tell us?
(226k) (by Anne Vila Wetherilt and Olaf Weeken of the Bank's Monetary Instruments and Markets Division). This article examines the usefulness of summary statistics, such as the price-earnings ratio and the dividend yield, that are commonly used in valuing equity markets. But these measures are very sensitive to assumptions made about the (unobservable) equity risk premium, as well as to the precise definitions of earnings or dividends used in the calculations. This limits their usefulness as summary statistics of equity valuations. Profit expectations and investment
(64k)(by Seamus Mac Gorain of the Bank's Monetary Instruments and Markets Division and Jamie Thompson of the Bank's Structural Economic Analysis Division). This article examines the relationship between expectations of future profits and companies' physical investment. Theory suggests that increased profit expectations should raise share prices as well as investment. But this correlation between investment and share prices may be rather weak if investors' opinions of companies' prospects differ from those of the companies' managers. Using a simple aggregate investment equation, the article illustrates that measures of profit expectations based on current profits and analysts' earnings forecasts appear to be more informative for investment than stock prices themselves. This result is consistent with recent research at the Bank using company data. |
| Autumn 2002 | The
balance-sheet information content of UK company profit warnings
(67k) (by Allan Kearns and John Whitley of the Bank's Domestic Finance Division). This article looks at the information content of profit warnings issued by UK private non-financial companies over the period 1997-2001 in relation to measures of their profitability and balance-sheet strength. It finds that profit warnings are associated with a persistent fall in profit margins and that this decline in margins is larger than for companies who do not issue warnings. The article also finds that profit warnings contain incremental information for other balance-sheet variables: those firms who issue warnings are also more likely to see their gearing levels rise, and investment and dividends fall, than other firms whose profit margins also fall but who do not issue a warning. |
