from THE JAKARTA POST -- WEDNESDAY, SEPTEMBER 16, 2009 -- PAGE 16 The traditional accounting model of valuation argues that particular equity share prices are set when the stock exchange capitalizes a company's earnings per share (EPS) at an appropriate price/earning (P/E) ratio.
The difficulty is that the P/E ratio of a company changes all the time and this makes the EPS and P/E methods very unreliable as measurement tools for value.
As a consequence, both of the traditional models of performance measurements are inadequate in the sense that neither of them addresses the main concern of shareholders: i.e. is the management adding or subtracting value from their invested capital? Modern finance literature offers better measurement tools for value, namely economic and market value methods.
These methods acknowledge that it is crucial to generate and measure the profit …