A new, data-intensive technique can create a better profile of a firm and its profit forecast. Photo via Pexels

Earnings summaries are the corporate version of a Magic 8 Ball, something used to forecast future performance and profit. But Rice Business professor Brian Rountree has found that magic has its limits, and that by delving into a few additional areas of interest, investors can get a more accurate prediction of a company's future earnings than current techniques allow.

Plenty of studies analyze how to use performance summaries to calculate a firm's potential and future profits. Building on the abundant literature around this approach, Rountree, working with colleagues Andrew B. Jackson of the UNSW Australia Business School and Marlene Plumlee of the University of Utah, devised a new, additional technique for forecasting profits. By dissecting an assortment of operating details, the researchers discovered, it's possible to create a more precise forecast of a company's financial future.

Rather than replacing prior work on the subject, Rountree's team delved deeper into the significance of details within existing data. Their focus: whether including a firm's market, its overall industry and any unique activity specific to the firm makes for a more reliable profit forecast. Their conclusion: Firms can indeed improve their predictions if they separate returns on net operating assets (RNOA) into separate components and use those figures in their projections.

Normally, firms use market and industry related data to create future profit predictions. For example, a major oil company might use data on market conditions and the overall state of the oil industry to build its profits prediction. The resulting financial literature might be peppered with statements such as, "Like the rest of big oil…" or "The overall market for oil remains soft."

While this type of data is typically used to make projections, Rountree and his colleagues used the market and industry information more formally by creating the equivalent of stock return betas — a statistical measure of risk — for corporate earnings. In addition, they allowed for adding firm-specific information to market and industry information to help forecast earnings.

To conduct their study, Rountree's team used Compustat quarterly data to calculate firm, industry and market RNOAs from 1976 to 2014. Next, they broke these figures down and separated the results into different categories.

Their resulting formula differs from the conventional approach because it doesn't rely on one average set of market and industry-related data for each firm. Instead, it assumes varying factors for each company. The devil is in these details: Calculating specific market, industry and firm-idiosyncratic components improves the chances of forecasting profits correctly.

Correctly breaking down and separating profitability details to plug into the new formula is no small task. Separating company data into just three components requires up to 20 quarters of figures about prior profitability.

Once the information is processed, a researcher must then be vigilant for "noise" — incidental, irrelevant data that can lead to errors. Finally, Rountree warns, the breakdown process may not work as well for forecasting bankruptcy as it does for profits.

Used correctly, however, the technique is a practical new tool. By breaking down profitability into market, industry and firm-specific idiosyncrasies, researchers can improve forecasts strikingly compared to conventional calculations of total RNOAs.

The most accurate profit forecasts in other words, demand more than just a figurative shake of an industry Magic 8 Ball. To find the most reliable information about future earnings, a company instead has to flawlessly juggle years' worth of specific details about their particular firm. But the reward of planning based on a correct forecast can pay for itself.

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This story originally ran on Rice Business Wisdom. It's based on research by Brian Rountree, an associate professor of accounting at Jones Graduate School of Business at Rice University.

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TMC lands $3M grant to launch cancer device accelerator

cancer funding

A new business accelerator at Houston’s Texas Medical Center has received a nearly $3 million grant from the Cancer Prevention and Research Institute of Texas.

The CPRIT grant, awarded to the Texas Medical Center Foundation, will help launch the Accelerator for Cancer Medical Devices. The accelerator will support emerging innovators in developing prototypes for cancer-related medical devices and advancing them from prototype to clinical trials.

“The translation of new cancer-focused precision medical devices, often the width of a human hair, creates the opportunity to develop novel treatments for cancer patients,” the accelerator posted on the CPRIT website.

Scientist, consultant, and entrepreneur Jason Sakamoto, associate director of the TMC Center for Device Innovation, will oversee the accelerator. TMC officials say the accelerator builds on the success of TMC Innovation’s Accelerator for Cancer Therapeutics.

Each participant in the Accelerator for Cancer Medical Devices program will graduate with a device prototype, a business plan, and a “solid foundation” in preclinical and clinical strategies, TMC says. Participants will benefit from “robust support” provided by the TMC ecosystem, according to the medical center, and “will foster innovation into impactful and life-changing cancer patient solutions in Texas and beyond.”

In all, CPRIT recently awarded $27 million in grants for cancer research. That includes $18 million to attract top cancer researchers to Texas. Houston institutions received $4 million for recruitment:

  • $2 million to the University of Texas MD Anderson Cancer Center to recruit Rodrigo Romero from Memorial Sloan Kettering Cancer Center in New York City
  • $2 million to MD Anderson to recruit Eric Gardner from Weill Cornell Medicine in New York City

A $1 million grant also went to Baylor College of Medicine researcher Dr. Akiva Diamond. He is an assistant professor at the medical college and is affiliated with Baylor’s Dan L. Duncan Comprehensive Cancer Center.

Houston students develop cost-effective glove to treat Parkinson's symptoms

smart glove

Two Rice undergraduate engineering students have developed a non-invasive vibrotactile glove that aims to alleviate the symptoms of Parkinson’s disease through therapeutic vibrations.

Emmie Casey and Tomi Kuye developed the project with support from the Oshman Engineering Design Kitchen (OEDK) and guidance from its director, Maria Oden, and Rice lecturer Heather Bisesti, according to a news release from the university.

The team based the design on research from the Peter Tass Lab at Stanford University, which explored how randomized vibratory stimuli delivered to the fingertips could help rewire misfiring neurons in the brain—a key component of Parkinson’s disease.

Clinical trials from Stanford showed that coordinated reset stimulation from the vibrations helped patients regain motor control and reduced abnormal brain activity. The effects lasted even after users removed the vibrotactile gloves.

Casey and Kuye set out to replicate the breakthrough at a lower cost. Their prototype replaced the expensive motors used in previous designs with motors found in smartphones that create similar tiny vibrations. They then embedded the motors into each fingertip of a wireless glove.

“We wanted to take this breakthrough and make it accessible to people who would never be able to afford an expensive medical device,” Casey said in the release. “We set out to design a glove that delivers the same therapeutic vibrations but at a fraction of the cost.”

Rice’s design also targets the root of the neurological disruption and attempts to retrain the brain. An early prototype was given to a family friend who had an early onset of the disease. According to anecdotal data from Rice, after six months of regularly using the gloves, the user was able to walk unaided.

“We’re not claiming it’s a cure,” Kuye said in the release. “But if it can give people just a little more control, a little more freedom, that’s life-changing.”

Casey and Kuye are working to develop a commercial version of the glove priced at $250. They are taking preorders and hope to release 500 pairs of gloves this fall. They've also published an open-source instruction manual online for others who want to try to build their own glove at home. They have also formed a nonprofit and plan to use a sliding scale price model to help users manage the cost.

“This project exemplifies what we strive for at the OEDK — empowering students to translate cutting-edge research into real-world solutions,” Oden added in the release. “Emmie and Tomi have shown extraordinary initiative and empathy in developing a device that could bring meaningful relief to people living with Parkinson’s, no matter their resources.”