Financial ratios, such as return on equity, are conceptually imperfect indicators of the overall financial performance of publicly held forest products firms because they are based on accounting data, they ignore risk, and they discourage long-term planning horizons. This article addresses this problem by presenting and analyzing a market value, risk-adjusted approach for evaluating financial performance. The approach is found to produce output that is significantly correlated with return on equity results for a group of forest products firms. However, the financial performance ranking of a notable portion of forest products firms was found to be highly dependent upon the performance indicator used. Since the market value, risk-adjusted approach is more consistent with the shareholder wealth maximization objective than is return on equity, it is recommended for use as an indicator of overall financial performance.
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