Chapter 32. Equity Analysis Using Traditional and Value-Based Metrics


Professor in the Practice of Finance, Yale School of Management


JLG Research and Professor of Finance, University of Massachusetts (Boston)

Abstract: Informed investors need a prism for discerning value within the companies that they invest in. Historically, investors and analysts alike have evaluated company and stock performance in terms of two seemingly distinct types of financial analysis—namely, traditional fundamental analysis and value-based metrics analysis.

Keywords: value-based metrics (VBM), growth rates, margins, return on equity (ROE), Dupont formula, price multiples, comparables, forecasted fundamentals, regression analysis, common factors, fundamental stock return (FSR), undervalued, overvalued stock, Economic Value Added (EVA ®), economic value added spread, market value added, cash flow return on investment (CFROI ®), residual income (RI), residual income spread, EVA momentum, good company growth, bad company growth, good stocks, bad stocks

In this chapter, we combine traditional metrics and value-based metrics with the goal of showing their joint role in equity fundamental analysis and securities valuation. After reviewing the relevant metrics, we'll apply traditional and value-based metrics analyses to illustrate the benefits of using a synthesized approach to equity analysis in distinguishing "good" companies—potential buy opportunities—from "bad" ...

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