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Adverse evidence is starting to appear within UK companies regarding the validity of using traditional measures such as profit and EPS to measure a company's performance. There is considerable evidence that share prices reflect a company's expected underlying cash flows. For example, there are several studies, which show that the markets are not fooled by changes in accounting policy, which affect earnings but not affect cash flows and the value of a business (Barfield, 1991).

This is contrary to the common assumption in the UK that EPS is what counts. EPS is important as an indicator, as a signal for future performance. Barfield (1991) states that managing EPS is not the same as managing the value of the business as was evident in the eighties when UK companies bought earnings through debt-financed acquisitions. That did wonders for EPS (and some executive bonuses) but often destroyed shareholder value. The mood has charged. One plc chairman states that he does not even know what his EPS figure is all his team concentrate on cash flow.

If someone wants to take my arbitrarily determined accounting profit and divide it by the number of shares in issue at a particular time, that's fine by me, but it's got nothing to do with the value of my business Cited in Barfield R. (1991) To overcome the problems with profit, shareholder value based measures have been constructed which provide a reliable guide to value creation. Cornelius and Davies (1997) stated that shareholder value based measures are divided into two categories: 'market based' and 'internal'.

Market based measures provide an insight into how the stock market values a company's performance and therefore represents the ultimate test of shareholder value performance of a company.

There are three external market based measures, namely,
(1) Market Value Added (MVA),
(2) Market to Book Ratio (MBR), and
(3) Total Shareholder Return (TSR).

To over come the limitations of external measures, a variety of internal measures have been developed to assist managers in identifying value creating and value destroying on a unit-to-unit basis as well as for the entire organisation (Cornelius and Davies, 1997). There are a number of internal measures developed by consultancies (Nichols, 1998):

(1) Shareholder Value Analysis (SVA);
(2) Economic Profit (EP);
(3) Economic Value Added (EVA),
(4) Cash Flow Return on Investment (CFROI); and
(5) Total Business Return (TBR).