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    BCG Approach

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    Adhitya
    BCG has defined two metrics for measuring shareholder value: TSR and TBR. TSR measures total shareholder returns based on dividends, share price changes, and cash flows to investors. TBR measures returns from the perspective of a business division based on free cash flow and equity value changes. BCG also advocates measuring corporate profitability using CFROI, which corrects for subjective accounting by assessing a firm's actual economic returns based on net operating profit and gross investment adjusted for depreciation and inflation. CFROI is preferred over EVA as it makes inflationary adjustments to assets and uses a consistent gross investment measure.

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    BCG Approach

    Uploaded by

    Adhitya
    320 views2 pages
    BCG has defined two metrics for measuring shareholder value: TSR and TBR. TSR measures total shareholder returns based on dividends, share price changes, and cash flows to investors. TBR measures returns from the perspective of a business division based on free cash flow and equity value changes. BCG also advocates measuring corporate profitability using CFROI, which corrects for subjective accounting by assessing a firm's actual economic returns based on net operating profit and gross investment adjusted for depreciation and inflation. CFROI is preferred over EVA as it makes inflationary adjustments to assets and uses a consistent gross investment measure.

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    CFROI,EVA

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    BCG has defined two metrics for measuring shareholder value: TSR and TBR. TSR measures total shareholder returns based on dividends, share price changes, and cash flows to investors. TBR measures returns from the perspective of a business division based on free cash flow and equity value changes. BCG also advocates measuring corporate profitability using CFROI, which corrects for subjective accounting by assessing a firm's actual economic returns based on net operating profit and gross investment adjusted for depreciation and inflation. CFROI is preferred over EVA as it makes inflationary adjustments to assets and uses a consistent gross investment measure.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    320 views2 pages

    BCG Approach

    Uploaded by

    Adhitya
    BCG has defined two metrics for measuring shareholder value: TSR and TBR. TSR measures total shareholder returns based on dividends, share price changes, and cash flows to investors. TBR measures returns from the perspective of a business division based on free cash flow and equity value changes. BCG also advocates measuring corporate profitability using CFROI, which corrects for subjective accounting by assessing a firm's actual economic returns based on net operating profit and gross investment adjusted for depreciation and inflation. CFROI is preferred over EVA as it makes inflationary adjustments to assets and uses a consistent gross investment measure.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    BCG Approach

    BCG has come up with an approach to shareholder value management and defined
    two metrics namely
    TSR and TBR

    1. TSR- Total Shareholder Returns

    TSR measures the full returns earned by shareholders from owning a


    stock over a period of time. TSR can be calculated as follows:

    TSR = Dividend per share +(Ending share price-Beginning share


    price)/Beginning share price

    TSR is Internal rate of return(IRR) of all cash flows paid to investors


    during particular period

    But this SHAREHOLDER VALUE APPROACH has come under increasing


    scrutiny in recent years. It is argued that the approach encourage
    managers to put interests of shareholders above those of other
    stakeholders.

    This approach makes the manager to focus on managing quarterly


    earnings(Short term) at the expense of sustainable value(long term)

    2. TBR Total Business Returns

    While TSR measures the returns from companys shareholders


    perspective, TBR measures the returns from business divisional or
    Strategic Business Unit(SBU) perspective. TBR is calculated as follows
    TBR = (Free Cash flow)/(Beginning equity value) + (Ending equity
    value Beginning Equity value)/Beginning equity value
    TBR is internal equivalent of TSR

    3. CFROI

    Corporate financial statements can be misleading. Companies typically


    employ subjective accounting methods such as depreciation and offbalance sheet items which misrepresent the true profitability of the
    firm.
    The HOLT methodology corrects the subjectivity by converting income
    statement and balance sheet into a CFROI return, a measure that
    closely look into companys underlying economics.
    CFROI is proxy for companys economic return. CFROI is calculated as
    follows:
    CFROI = (Gross Cash flow- Economic Depreciation)/Gross Investment
    Gross cash flow is (NOPAT+ Accounting Depreciation)
    Gross Investment is (Net asset value + Accumulated Depreciation +
    Current dollar adjustment)
    CFROI for a firm is IRR on existing investments based upon real cash
    flows. CFROI should be compared to real cost of capital to make
    judgments about the quality of investments

    4. CFROI versus EVA

    CFROI is a % measure while EVA is absolute dollar value


    CFROI makes inflationary adjustments on the assets but EVA does not.
    EVA uses Net fixed assets which is not a consistent measure. When the
    new assets are employed, depreciation amount for those assets will be
    higher, resulting in less EVA value and as on when the assets become
    older, correspondingly EVA will become higher.
    But CFROI uses Gross Investment which makes inflationary
    adjustments.

    References
    1. https://www.bcg.com/documents/file90853.pdf
    2. http://people.stern.nyu.edu/adamodar/pdfiles/valn2ed/ch32.pdf
    3. Strategic Financial Management textbook by Prasanna
    Chandra

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