deletions | additions       diff --git a/introduction.tex b/introduction.tex  index 2db7416..a425727 100644  --- a/introduction.tex  +++ b/introduction.tex 
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\section{Introduction}  In a prior working paper, Pierre and al. have showed how to build a stock selection framework based on the profitability of a firm and its stock price valuation. This Profitability-Valuation framework is derived from the Residual Income Model (hereafter \textit{RIM}) which is in fact a derivation of the Dividend Discount Model (hereafter \textit{DDM}). In this context, Pierre and al. show that profitability is necessarely measured using Return On Equity (hereafter \textit{ROE}) while the valuation metric is necessarely the Price To Book (hereafter \textit{PB}). As such, screening for stocks using ROE and PB consists in buying stocks that appear cheap from a dividend perspective or, more generally from an earnings perspective. En effet, dividends can be replaced by earnings as long as the clean surplus accounting rule that underpins the RIM is observed.  \\ Drawbacks of the dividend or earnings approach to valuation are well known. and For example, earnings are a pure accounting measure that can be manipulated because it incorporates non-cash items of the income statement. Another drawback often mentioned by practitioners is that profitability measures based on earnings depend on a firm's gearing, defined as the amount of debt relative to equity. A company can have an attractive \textit{ROE} despite having an unattractive Return on Invested Capital (hereafter \textit{ROIC}). More importantly, a company using financial leverage to enhance its \textit{ROE} actually makes it more volatile often at the expense of its financial strength (measured by the health of the balance sheet). For these reasons,  practitioners in the equity investment community tend to prefer cash-flow based valuation metrics. \\ The purpose of this working paper is to show that it is perfectly feasable to adapt the Profitatbiliy-Valuation framework so as to hinge it on a firm's cash-flows instead of earnings. Using cash-flows as several advantages namely that it allows us to avoid the debt caveat.  $V_{t}=\displaystyle\sum_{i=1}^{K}\frac{C_{t+i}}{(1+R)^i}+V_{t+K}$ 
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$B_{t}=E_{t}-RB_{t-1}$  This should allow to contourner caveats of earnings/dividends valuation model. We build a new Profitability/Valuation framework that hinges on the cash-flows a firm is able to generate. Using cash-flows allows to neutralize the leverage effect at the operating level of a firm as well as the balance sheet level. The paper is organized as follow. As a means of introduction we remind the basic principles behind asset valuation and show how they can be translated into equity valuation models. In the first section, we give a brief description of the links between the \textit{DDM}, the \textit{RIM} and the \textit{PB-ROE} framework. We also show how the \textit{PB-ROE} framework can be used as a screening tool for equity investors. In the second section, we show how we can build a new Profitability/Valuation framework based on a firm's cash-flows instead of a firms earnings. the deals with accounting relationship.   earnings are a pure accounting measure that can be manipulated because it incorporates non-cash items of the income statement. Another drawback often mentioned by practitioners is that profitability measures based on earnings depend on a firm's gearing, defined as the amount of debt relative to equity. A company can have an attractive Return on Equity (hereafter \textit{ROE}) despite having an unattractive Return on Invested Capital (hereafter \textit{ROIC}). More importantly, a company using financial leverage to enhance its \textit{ROE} actually makes it more volatile often at the expense of its financial strength (measured by the health of the balance sheet).