Abstract

The traditional Profitability-Valuation framework is based on the Residual Income Model which is in fact a derivation of the Dividend Discount Model. Drawbacks of the dividend or earnings approach to valuation are well known, and practitioners in the equity investment community tend to prefer cash-flow based valuation metrics. We show that it is perfectly feasable to build a Profitability-Valuation framework based on a firm's cash-flows.