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Ratio Analysis and Equity Valuation from Research to Practice

Review of Accounting Studies, 6, 109 154, 2001 C2001 Kluwer Academic Publishers. Manufactured in The Analysis and Equity Valuation :From Research to PracticeDORON University, Graduate School of Business, 3022 Broadway, Uris Hall 604, New York, NY 10027 STEPHEN H. University, Graduate School of Business, 3022 Broadway, Uris Hall 612, New York, NY statement Analysis has traditionally been seen as part of the fundamental Analysis requiredfor Equity Valuation . But the Analysis has typically been ad hoc. Drawing on recent Research on accounting-basedvaluation, this paper outlines a financial statement Analysis for use in Equity Valuation . Standard profitabilityanalysis is incorporated, and extended, and is complemented with an Analysis of growth.

RATIO ANALYSIS AND EQUITY VALUATION 111 Our focus on the residual income valuation model is not to suggest that this model is the only model, or even the best model, to value equities. Penman (1997) shows that dividend and cash-flow approaches give the same valuation as the residual income approach under certain conditions.

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