Journal of Business Finance & Accounting 9, 1 (1982), 63-74.
There is a considerable body of literature seeking to estimate the
long-run profitability of the firm by trying to establish a relation
between the internal rate of return (IRR) of the firm's capital
investments and the firm's accountant's rate of profit (ARP), also
called accountant's rate of profit (ARR), return on capital invested
(ROI) and book yield. Furthermore, Ruuhela (1972) and (1975)
presented in Finnish a model for measuring the long-run
profitability of the firm by estimating the IRR from published
financial statements directly. This paper presents the derivation of
Ruuhela's model. The aim of this paper is to improve and
significantly streamline the original derivation. Additionally,
contrary to the original derivation from funds flows concepts, the
income statement and balance sheet are used as the obvious
conceptual basis in deriving the components of long-run financing.
Finally, the method is demonstrated by applying it to the financial
time series of a particular Finnish firm.
Keywords: financial statement analysis, profitability estimation,
internal rate of return
doi:10.1111/j.1468-5957.1982.tb00973.x