Abnormal Earnings Valuation
What is Abnormal Earnings Valuation?
How Does Abnormal Earnings Valuation Work?
So, for instance, if the book value per share of Company XYZ is $5, then any unexpected financial results Wall Street expectations, then management essentially gets the for any increase in the above that book value per share threshold. Likewise, if Company XYZ reports lower-than-expected earnings per share, then management also get the blame for any decrease in the below book value per share.make the price deviate from that $5 mark. Those unexpected results are attributable to the management -- either it is underdelivering or overdelivering profits to the shareholders -- and indicate that the company is not going to earn a "normal" rate of return in the future. If Company XYZ begins reporting earnings per share for the quarter that are above
Why Does Abnormal Earnings Valuation Matter?
The primary philosophy behind the abnormal earnings valuation model is that the portion of a's price that is above or below is attributable to the expertise of the company's management. Accordingly, it becomes a handy tool for calculating what the "real" value of a is. It is important to , however, that should pay special attention to incorporating changes in per share caused by share buybacks and other unusual events that may distort the analysis.