Abnormal Earnings Valuation Model

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DEFINITION of 'Abnormal Earnings Valuation Model'

A method for determining a company's worth that is based on book value and earnings. Also known as the residual income model, it looks at whether management's decisions cause a company to perform better or worse than anticipated. The model says that investors should pay more than book value if earnings are higher than expected and less than book value if earnings are lower than expected

BREAKING DOWN 'Abnormal Earnings Valuation Model'

There are numerous other methods for valuing companies, including P/E ratio, price-to-book value ratio, return on equity, return on capital employed and discounted cash flow. Investors and analysts should not place too much emphasis on any one of these (or a number of other) measures of value because no single method can provide a complete picture of a company's financial performance.

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