CFROI Valuation

1st Edition

Authors: Bartley Madden
Hardcover ISBN: 9780750638654
eBook ISBN: 9780080476421
Imprint: Butterworth-Heinemann
Published Date: 15th February 1999
Page Count: 356
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What generates shareholder value? How can it be evaluated? How can it influence investment decisions and corporate strategy? Cash Flow Return On Investment answers all these questions by detailing the pioneering financial research carried out by HOLT Value Associates, the leading consultancy in the field.

Read this book if you want to find out what really drives the wealth generation in any business, allowing you to pick which equities will succeed and which strategic initiatives are destined for high returns.

The CFROI model is an essential tool for professionals working in finance and corporate strategy. It clarifies how economic value is created in a firm and acts as a reliable guide to:

  • making investment decisions
  • taking key strategic decisions
  • understanding economic value

Key Features

Shows how to judge and compare individual equities across markets and company sectors Cutting edge theory and practice The leading book about shareholder value authored by one of the world's leading consultancies in the field


Investment analysts and managers; Corporate finance departments; Investor relations professionals; Fund trustees, CEOs; CFOs; students of masters courses in finance and investment

Table of Contents

Preface; Summary - purpose; main messages; Key Criteria For Assessing Valuation Models - background; valuation models and the big picture; shareholder value inside the firm; seven key criteria; Basic Valuation Elements - pricing equation; net cash receipt (ncr) stream; economic performance-achieved ROI; dcf valuation models; CFROI Life Cycle - pricing equation revisited; managerial skill and competition; measuring skill-firm's track record; time series of cfroi; cfroi life cycle; sustainable asset growth; life cycle examples;CFROI Valuation Model - accuracy versus simplicity-no free lunch; holt's cfroi valuation model; company example-briggs & stratton; CFROI Fade Rates - competition and skill; measurable characteristics; empirical results; Market-Derived Discount Rate And Risk Differentials - why disregard capm and beta?; forward-looking discount rate; discount rate as an integral part of valuation model; aggregate composition; leverage and size; risk differentials; Valuation Sensitivity - existing assets; future investments; alternative levels of firm's future performance; plausibility of forecast performance; corporate performance benchmarks; Corporate Performance Scorecards - two parts to performance; holts dual grade (tm) performance scorecard; problems with shareholder returns; comparison to stern stewart's mva; Intelligence Gathering - stock prices contain astute forecasts; near-term performance; long-term performance; critique one's level of knowledge; machinery industry; buy/sell investment decisions; Total System Perspective For Valuation Analysis - advantages and limitations of the cfroi valuation model; limitations of accounting statements; balanced scorecards; lean thinking; strategic planning-marrying skill and growth; intellectual capital; implications of thermo electron; experimental financial statements; Critical Thinking - strongly held beliefs and independent 'realities'; methodology of positive economics; post modern finance; theory of the busine


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© Butterworth-Heinemann 1999
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About the Author

Bartley Madden

He has a B.S. in Mechanical Engineering from the University of Southern California and an MBA from the University of California-Berkeley. He has been published in economics, finance, and engineering journals, and in the Wall Street Journal and other business publications. Bart's work on the CFROI valuation model dates back to the late 1960s. The Journal of Investing has published two of his recent articles. Appearing in the Summer 1996 issue, "The CFROI Life Cycle" is an empirical study that underpins the CFROI-model's fade rates. "The CFROI Valuation Model," published in the Spring 1998 issue, presents empirical support and argument for the CFROI-model's market-derived discount rate as superior to the conventional CAPM/beta approach used for estimating firms' costs of capital.

Affiliations and Expertise

Partner at HOLT Value Associates, focusing on research in economics and finance, with many published articles. Formerly an investment manager at Harbor Capital Advisors, he is a co-founder of Callard, Madden & Associates, where he developed links between inflation-adjusted corporate performance measures and stock prices, while consulting with large industrial companies.


A reader from New York on Amazon.Com CFROI explains stock prices better than P/E ratios Best finance book I have read in years! The book is a quick read and does a terrific job of explaining the investment framework employed by institutional portfolio managers world-wide. CFROI brings the concept of return on invested capital to a more robust level by providing the investor with a greater understanding of stock price movement and valuation. This book is a must read if you expect to outperform the market. The increased complexity of accounting rules over the last decade has forced investors to apply an analysis process focused on a company's future cash flows. The accuracy of the CFROI valuation framework places traditional analysis and EVA at the bottom of the investor's toolbox. CFROI can help you avoid value trap stocks and step up to high PE stocks who are expected to create wealth for their shareholders. 'Bart Madden's path-breaking study of CFROI is one of the most important works on corporate finance to appear in the past three decades.' H. Thomas Johnson - Retzlaff Professor of Business Administration, Portland State University (Oregon) 'This is a well thought out and splendidly written handbook of the CFROI (Cash Flow Return On Investment) Valuation method.. I would expect to find this book on the desk of every corporate and investment financial analyst and manager.' George M. Frankfurter - Lloyd F. Collette Professor of Financial Services, Louisiana State University 'Written from a practitioner's perspective, this book nevertheless brings striking insights to academic debates on cost of capital, the handling of accounting items and cross-sectional differences in ROI fade rates.' Charles M. C. Lee - Henrietta Johnson Louis Professor of Management, Director, Parker Center for Investment Research, Cornell University