CFROI Valuation: A Total System Approach to Valuing the Firm

Chapter 2: CFROI Life Cycle

Overview

Summary
  • Twenty example companies performance records in terms of some key CFROI-model variables are displayed as time series to enable readers to see some of the CFROI model's advantages.

  • First, highly summarized descriptions of the CFROI-model components relevant to the displayed time series are presented so that readers will have the basic understanding needed to interpret the charts.

  • Economic performance can be understood as a real rate of return earned on a completed project where all cash outlays and receipts are expressed in monetary units of equivalent purchasing power.

  • The CFROI economic performance metric can be understood as an estimate of the real rate of return earned by a firm on all its assets, which can be thought of as a portfolio of projects.

  • Managerial skill and competition are the fundamental determinants of a firm's economic performance over time.

  • There is a competitive life cycle, wherein competition tends to force high CFROI firms downward over time toward the average. Below-average CFROIs for a number of years set the stage for restructuring, whether voluntary or forced upon management by outside shareholders. Significant improvement toward earning the cost of capital typically necessitates shrinking the firm.

  • The amount of wealth a firm creates is related to both the rate of return it earns on its assets and the amount of its assets. Consequently, all else equal, the increase in wealth creation is higher when high CFROI firms also grow fast.

Economic performance

Those experienced in the use of valuation models...

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