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Good accounting results and rising share prices can mask trouble ahead, and companies can create substantial value despite falling share prices. Developing a holistic picture of the health of a company—its ability to generate and sustain value—is difficult but doable.
Only by dissecting and analyzing the underlying factors that drive earnings per share and share prices can board members, managers, and investors truly assess the long-term prospects of companies.
This article is one of three adapted from the new edition of Valuation: Measuring and Managing the Value of Companies, by Tim Koller, Marc Goedhart, and David Wessels. To read the others, click on the links below: Do fundamentals—or emotions—drive the stock market? Emotions can drive market behavior in a few short-lived situations. But fundamentals still rule. Don't expect too much of your share price Companies are what they are, not what their executives want them to be perceived as being. But management can improve the match between share prices and intrinsic value.
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