From CFROI Valuation: A Total System Approach to Valuing the Firm
The CFROI performance metric is typically calculated from publicly available financial statements. By way of an actual company example, this chapter provides details of the many adjustments made to such data in the calculation of a CFROI. The adjustments are logically consistent with each other and with the complete CFROI valuation model.
The cash in/cash out perspective of the CFROI metric is that of all capital suppliers, both debt holders and equity owners, because the metric measures returns on total resources committed to the firm's operations. This perspective requires that all cash in/cash out amounts be measured in monetary units of equivalent purchasing power.
Calculation of a CFROI requires four major inputs: (1) life of the firm's assets, (2) amount of the firm's assets, (3) periodic gross cash flow and (4) nondepreciating asset release in the final year of asset life.
Included in the gross plant amount are, among other things, a capitalized value of leased operating assets and an appropriate amount of goodwill. HOLT's procedure for marking up reported historical-dollar plant amount to current dollars is described.
The handling of goodwill is shown to be related to the type of performance/valuation issue explored. Because historical asset amounts are lost when purchase accounting is used for acquisitions, it can hinder some performance/valuation analyses. A proposed solution is to use pooling accounting in financial statements and record the components of goodwill in a footnote.
In calculating the amount of non-depreciating assets for industrial/service companies, significant financial subsidiaries must be...
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