Analysis of the Relation between Corporate Sales and Earnings

Abstract

This paper examines the relation between corporate sales and earnings in the US on annual basis in the period 1950 to 2016. We document that both total revenues and earnings are non-stationary and therefore we use the Granger representation theorem and the methods of cointegration analysis and make a first attempt at representing the relation between these very important company characteristics with a statistical model. We document that such a relation does not exist between aggregate revenues and earnings. However, industry analysis provides long-run revenue-earnings relations for the different S&P industry sectors. Knowing and understanding better the top-line and bottom-line relation could further help external analysts in their quest for better valuations and forecasts. Many studies have focused on revenues alone and the factors affecting revenues, and earnings alone and the factors affecting earnings. In contrast to these studies this paper examines the relation between corporate sales and earnings, i.e. between the company‘s top-line and bottom-line. To the best of our knowledge this has not been done in the literature so far.