Potential earning power, which determines the True value of the firm, is best calculated using

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The potential earning power is best calculated using the discounted earnings method. This method estimates future cash flows and discounts them back to the present to determine their current value. This method is more appropriate for valuing companies that have strong growth potential and may not have a significant history of earnings, which would make the price/earnings ratio method less useful. The adjusted tangible book value method is typically used for companies that have a significant amount of tangible assets and may not be appropriate for valuing companies that have a significant amount of intangible assets or intellectual property.

Potential Earning Power, Which Determines the True Value of the Firm