Fixed Costs Impact Earnings Predictions

Because it can substantially affect a firm’s earnings volatility, the breakdown between fixed and variable costs can be important to security analysts attempting to forecast corporate results, interpret past performance or make inter-firm comparisons. On the other hand, analysts have rarely attempted to pinpoint the fixed element in firms’ costs, presumably because traditional income statements provide no breakdown.

Thanks to the SEC, however, enough data are now available to enable the analyst to estimate the value of a firm’s fixed cost component. The key data are: (1) depreciation, (2) rents, (3) interest on long-term debt, (4) property taxes and non-employment taxes, (5) pension expense and (6) maintenance and repair expense.