A new performance measure

But calculating the required business performance to support the price of the stock is only half the solution, because the RBP doesn't tell us whether the management of that company will actually achieve that performance.

We have to ask the most important due-diligence question: Can it be done? Can management actually deliver the performance to support the price of the stock?

• The required business performance (RBP) probability measures the likelihood that the management of a company will actually achieve its RBP.
  
  
• The risk indicator measures the likelihood that the management of a company will not meet its RBP and is the inverse of the RBP probability.
  
  

These probabilities provide an objective and disciplined way of measuring whether management can perform in future years in the way that reflects the company's current value. The RBP reduces the complexity of valuation to its basic components. It allows investors to understand and communicate a company's value.

The RBP probabilities are the cornerstone of the Dow Jones RBP Family of Indexes.

How we calculate RBP probability

To calculate the RBP probability for a given company, we calculate the required business performance for 10 years in the future and we collect the historical revenue achieved from each of the prior 12 periods.We next fit a distribution curve to the data and calculate the RBP probability. Our analysts assign higher weightings to those periods with revenue numbers that they believe are more relevant to future performance.

In this way, the RBP probability measures whether management will actually achieve the performance that has been priced into the stock, based on management's past performance.