Abstract: A . J. Merrett and Gerald D . Newbould P ortfolio managers generally treat the assessment of a firm’s financial performance and the valuation of its common stock as separate activities. On the one hand, they appraise corporate financial performance on the basis of a multiplicity of criteria such as profit margins, ROE, debtlequity ratios, and asset turnover. Stock valuation, on the other hand, particularly in the major brokerage firms, is determined in terms of some in-house variation of the classical dividends model. As we shall show below, this dichotomy of performance and valuation follows from two facts: None of the methods of performance leads directly into a stock valuation model, and the data used for valuation have no unequivocal meaning for performance measurement. This dichotomy is unsatisfactory. It is clearly unsatisfactory that we are unable to translate a given change in performance into terms of a ceteris puribus change in valuation, since the measure of performance is deficient in essential.meaning without the possibility of such a translation. It is equally unsatisfactory to be forced to obtain the data for stock valuation from an unspecified conflation of partial measures of performance. How much more satisfactory the portfolio manager’s job would be if we could derive stock valuation directly from a measure of corporate financial performance, where the valuation procedure and the measure of performance were both theoretically valid and empirically robust. This article will demonstrate the existence of this sought-after measure of financial performance and show the practical benefits of its use.