Over the long term, firms' NCR streams reflect managerial skill and competition. The skill level of management is revealed in the track records of firms. While the level of CFROIs is a key indicator of management skill, variability of CFROIs and the rate of asset growth are others.

Consistent with the competitive life cycle, empirical results indicate that competition tends to compress CFROIs toward the average. The direction and magnitude of change over four-year spans for firms grouped by CFROI was: (1) top-quintile-CFROI firms faded downward the most; (2) second-quintile firms faded downward; (3) middle-quintile firms, those with CFROIs near the average, faded little; (4) fourth-quintile firms faded upward; and (5) bottom-quintile firms faded upward the most. The fade effects of CFROI variability and asset growth also were consistent with life-cycle reasoning.

Sustainable growth for any year is the asset growth that would result from a continuation of the existing capital structure, the existing dividend-payout policy, and the CFROI for the same year. HOLT's growth-rate calculation procedures resolve end-of-year and beginning-of-year data problems.

Warranted-value calculations are traced step-by-step for an actual company. In treating all companies similarly and objectively, and in being consistent with the complete CFROI model, HOLT's life-cycle procedures serve as useful baselines for organizing data and thought, but they should not be considered sacrosanct. If users have better information about ROIs on future projects and asset growth for near-term than is implied by the baseline procedures, it should be used.

The advantages of...