Essentially, it's about how to create shareholder value, which is what makes companies thrive. It shows executives and corporate finance practitioners how to value companies using the discounted cash flow (DCF) approach and apply that information to make wiser business and investment decisions, such as corporate portfolio strategy, acquisitions, or performance management.

Executives must not only have a theoretical understanding of value creation, but must be able to create tangible links between their strategies and value creation. This means, for example, focusing less on recent financial performance and more on what they are doing to nurture a "healthy" company that can create value over the longer term.

Some are, but they shouldn't be. In spite of popular belief, the stock market is not overly concerned with the next quarter's earnings. Research shows that earnings surprises explain less than 2 percent of share price changes around announcements. We have found that when share prices react negatively to earnings announcements, this is driven by changes in long-term – not just short-term – earnings expectations.

Expectations of future performance are the main driver of stock prices. In almost all industry sectors, up to 80 percent of the stock market value can only be explained by cash flow expectations beyond the next three years. These longer-term expectations are driven by the investors' judgments of companies' growth plans and their long-term profitability.

Of course, some analysts and investors will always clamor for short-term performance from companies. But the techniques described in the book help managers to look after their companies' overall health, by which we mean their capacity to sustain strong performance, quarter after quarter, over the long-term. Sometimes, managers have to make trade-offs between short-term earnings and long-term value creation. Investments they make today may come at the expense of next years earnings but may be crucial to producing earnings in later quarters. DCF approaches help to provide the right answer when making such trade-offs.

In addition, performance in the short-term is a legitimate predictor of long-term performance. Getting the balance right is the key to maximizing value creation.

In this edition of Valuation, we present some ways to measure corporate performance and assess long-term health, and to test the robustness of particular strategies. Companies can use these to communicate to markets the wisdom of their choices. As we said, investors do take a "long-term" perspective. But sometimes, the only thing that they can base their perspectives on are short-term earnings because companies do not provide any information on the underlying fundamentals.

Yet investors want to know what drives the earnings results. These drivers will vary from company to company, and from industry to industry. But at the very least, investors want to understand the drivers of revenues, costs, and capital. For revenues, they want to know how big the market is, what new products are in the pipeline, how well the company develops new products, and what market share the company has achieved. For costs, investors want to know how well the company is driving down costs compared with competitors. Similarly, they want to know how much capital will be required to achieve future revenue growth. For example, retailers provide some of these answers when they disclose number of stores and same-store sales growth. When they also report sales per square foot, investors can monitor the impact of changes in store size and configuration. Mobile-telephone companies typically disclose information about their customer base, such as number of subscribers and average revenue per subscriber. In the pharmaceutical industry, many players detail their results by therapeutic area (e.g., cardiac drugs versus gastrointestinal drugs), describe drugs in the pipeline, and project market share and revenues for each major product.

When most managers think about long-term performance, they think about growth. But a healthy company isn't necessarily one with high-growth plans. Indeed, many companies have destroyed value through their growth ambitions, particularly when they resorted to overpaying for acquisitions; after all, over half of all mergers fail to create value for the buyer. Growth may well be part of sustaining performance, but the other key component is a decent return on capital invested. In fact, because many mature industries face low or declining growth, managing health may be more about sustaining returns on capital for most companies.

Yes, by and large, market valuations and the "intrinsic" value of companies do coincide, although recently some economists have argued that they don't. We find that significant deviations are typically isolated and short-lived incidents, applying to some companies, some of the time only.

For this edition of the book, we looked at the fit between the price-earnings ratios of the stock market as a whole in the US and the UK and the fundamental price-earnings ratio, based on long-term profitability and growth. Over the last 40 years, there has been a remarkably close fit between the two. There were some deviations but none of them lasted for more than a couple of years, and most only for a couple of months.

Yes, they're universal. They apply equally to mature manufacturing companies and high-growth technology companies. They apply as well to U.S. companies as to European and Asian companies. In fact, differences between valuation levels in these markets are largely explained by differences in fundamentals such as growth and return on capital. For example, Asian companies, on average, have significantly lower price-earnings ratios than their U.S. counterparts, in spite of their great growth prospects. The reason is that returns on capital for Asian companies are far lower than for U.S. companies.