Beating creativity with creativity:

Abstract

Abstract Conventional valuation model like DCF use cash flow estimates to determine firm value. However , experience suggests that model like DCF are not very accurate when it comes to forecasting returns and value creation by companies. While there is a wealth of literature available on financial disclosure and accounting , financial analysts fail to capture the value embedded in financial statements primarily because the construction and analysis of financial statements is seen as the domain of accountants. Valuation experts are skeptical of using accounting measures because they consider them to be “ distorted ” by accruals and creative accounting practices. In this paper we develop a conceptual; approach to show how financial statements and accounting measures can be used for financial analysis and valuation. Accruals and other accounting measures are true indicators of firm value and that is why they are recorded in the first place. A valuation model based on residual earnings has been used to value the 50 firms comprising the NSE S&P CNX Nifty Index. The valuation approach consists of reformulating and forecasting financial statements . estimating residual earnings and determining firm value. An integrated framework using price –to-book and price-to-earnings ratios is used to classify firms to be used as a comparative filter for identifying mispriced stocks. Finally ,an investment recommendation is developed for each of the 50 firms based on differences between market price and intrinsic value. It is our firm belief that the Residual Earnings model can be used by equity research analysis and portfolio managers to make superior investment decisions and confidently outperform the market.