An index that captures the deviation between actual income and trend income. The higher the index, the more unstable (less stable) a firm’s profitability is. A firm with an unstable earnings trend is exposed to a higher degree of risk than a firm with a stable trend. The instability index is calculated using the following formula:

Where: y is the reported net income and y^T is the trend income for period T. The trend income is usually computed using a trend equation such as this:

y^T= a + b (t)

Where: a is the dollar intercept, b is the slope of trend line, and t is the time period.

Other measures of earnings stability or instability include:

• Average net income.
• Average pessimistic earnings.
• Beta.
• Coefficient of variation.
• Standard deviation.