A technique for knowing a company's worth that is based on earnings and book value. It is also known as the residual income model, it seems at whether management's decisions cause a company to perform worse or better than predictable. The model says that investors must pay more than book value if earnings are more than expected and less than book value if earnings are lesser than expected

There are various other techniques for valuing companies, involving P/E ratio, return on equity, price-to-book value ratio, return on capital employed and discounted cash flow. Investors and analysts must not place too much stress on any one of these (or a number of other) measures of value as no single method can give a total picture of a company's financial performance.