| The ultimate purpose for the existence of a modem corporation equals to the maximization of stockholders' investment values. From this academic perspective, we explore in this dissertation how to objectively measure the profitability of China's listed companies. As usual as in the most countries, China's financial accounting system is based on accrual system and historic cost system. Given that corporate management can chose different accounting policies within legal framework, a company's book earnings are prone to be adjusted or rigged by its top executives, which may mislead investors in assessing the company's real return. In 1990s, two brand-new profitability indices (EVA and MVA) begun to be adopted by more and more investors in western capital markets. Taking into account the current development of China's capital market, we don't think EVA and MVA indices effectively applicable to China's A-share market. Alternatively we suggest introducing FCF (Free Cash Flow) index to replace the ordinary profitability indices of financial accounting, such as ROE or EPS, in hopes of identifying a company's real investment return. According to the related statistics through analysis of FCF and cash flow solvency margin, we find out that general profitability of the A-share listed companies is still very thin and meager, far from getting investors satisfied. No wonder it's very hard for various investors to form a "Value Investment Philosophy" in China. Under current circumstances, the most important task confronting us is to take effective measures for a thorough-going reform within the accounting and legal regulatory frameworks, in bid to ensure a more profitable performance of all listed companies. It's the only way in which the so-called "Value Investment Philosophy" takes root among millions of investors in China, also the unique way in which a prosperous and vigorous economy in the country can be expected. |
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