O Accruals, Cash and Decomposed Leverage Have Any Information about Future Profitability? Some Evidence from India

Forecasting future profitability has been a much researched area in corporate finance. Several studies have established that the balance sheet and income variables have differing predictive ability. Prominent among them are the accruals and present cash flows. This paper studies the ability of decomposed leverage and cash holdings by firms in predicting the future net earnings. Leverage has been classified as operating liability leverage arising out of day-to-day operations and financial leverage which arise due to the need of financing. The study finds that both operating and financial leverage has significant negative effect and the opening cash holding has a significant and positive effect on future profitability