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CFROI Valuation Hardcover – Mar 8 1999


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Product Details

  • Hardcover: 356 pages
  • Publisher: Butterworth-Heinemann; 1 edition (March 8 1999)
  • Language: English
  • ISBN-10: 0750638656
  • ISBN-13: 978-0750638654
  • Product Dimensions: 25 x 19 x 2 cm
  • Shipping Weight: 748 g
  • Average Customer Review: 5.0 out of 5 stars  See all reviews (2 customer reviews)
  • Amazon Bestsellers Rank: #611,587 in Books (See Top 100 in Books)
  • See Complete Table of Contents


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Format: Hardcover
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.
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By A Customer on Nov. 21 1998
Format: Hardcover
Madden's text substitutes empirical fact for academic claptrap, clearing away the underbrush of neat-though-erroneous theories like CAPM and EVA, giving the conscientious professional and serious amateur a meticulous roadmap to superior understanding and investment returns. Or in Madden's words, "The employment of CAPM/beta and related procedures has become a ritual due not to empirical usefulness, but to its mathematical elegance - the touchstone of mainstream academic corporate finance." The justification for CFROIs demanding discipline is demonstrated early in the text in an example, wherein the past real record of a hypothetical firm with a stable 6.5 % ROI is converted into GAAP accounting numbers from which an ROI series is calculated. In re the accounting-based return history, Madden asks, "Who referring to (the chart) would not be misled about a firm's performance relying on the (ROI gyrating between + 24% and -10%) while the economic performance did not vary?" In short, if you don't know the facts, you can't solve the mystery. The predictive and interpretive powers of the system's valuation metric is the result of plain hard work, not the magical properties of some lazy man's statistical dowsing rod like Earnings Momentum. Last widely employed during the Tulip Craze of an earlier century, Earnings Momentum is based on the dubious concept that as long as accounting earnings, surreal and manipulable though they be, go up, the stock should go up as fast as it does go up, unless earnings don't go up as fast as expected, in which case we've been disappointed, so it's not worth anything until the bookies can reestablish the odds.Read more ›
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Amazon.com: 4 reviews
59 of 64 people found the following review helpful
The millenium stock selection model Nov. 21 1998
By A Customer - Published on Amazon.com
Format: Hardcover
Madden's text substitutes empirical fact for academic claptrap, clearing away the underbrush of neat-though-erroneous theories like CAPM and EVA, giving the conscientious professional and serious amateur a meticulous roadmap to superior understanding and investment returns. Or in Madden's words, "The employment of CAPM/beta and related procedures has become a ritual due not to empirical usefulness, but to its mathematical elegance - the touchstone of mainstream academic corporate finance." The justification for CFROIs demanding discipline is demonstrated early in the text in an example, wherein the past real record of a hypothetical firm with a stable 6.5 % ROI is converted into GAAP accounting numbers from which an ROI series is calculated. In re the accounting-based return history, Madden asks, "Who referring to (the chart) would not be misled about a firm's performance relying on the (ROI gyrating between + 24% and -10%) while the economic performance did not vary?" In short, if you don't know the facts, you can't solve the mystery. The predictive and interpretive powers of the system's valuation metric is the result of plain hard work, not the magical properties of some lazy man's statistical dowsing rod like Earnings Momentum. Last widely employed during the Tulip Craze of an earlier century, Earnings Momentum is based on the dubious concept that as long as accounting earnings, surreal and manipulable though they be, go up, the stock should go up as fast as it does go up, unless earnings don't go up as fast as expected, in which case we've been disappointed, so it's not worth anything until the bookies can reestablish the odds. Had we all expended the necessary effort on CFROI, we might have anticipated or at least understood to our financial benefit and peace of mind: IBM problems in the mid-80s to mid-90s that led to a restructuring; Wal-Mart's staggering gait beginning in the late 80's that produced unsatisfactory price action in the early 90's; Hewlett Packard's defiance of gravity in maintaining an exceptional internal rate of return; ditto Abbot Labs, Hershey and Wrigley's outperforming the market; the rebound of Analog Devices and the volatility of Advanced Micro Devices; and so on and on. The CFROI knowledge system dissects the firm and the value creation process, meticulously separating the past and present from the nebulous future, thereby establishing a mathematical basis for professional investment decision making. The CFROI valuation model applies dividend discount technique to inflation-adjusted cash flow growth projections, using a firm-specific risk premium plus the market-required rate of return to determine the firms warranted value and the equity's warranted price. CFROI resolves two fundamental equity valuation issues: the recognized fallibility of the Capital Asset Pricing Model and the inherent inconstancy of accounting data. The former supplying a counter-intuitive cost of capital or required rate of return; the other concealing the real prospects of the firm's wealth creating efforts. As the lengthy flow charts detailing the process required to turn accounting hash into economic reality attest, CFROI is not a black box of unexplained miracles. It's a sweatshop equipped with empirically-proven, high tech tools which give the driven amateur and dedicated professional the means to outrun the herd.
36 of 44 people found the following review helpful
CFROI explains stock prices better than P/E ratios June 29 1999
By A Customer - Published on Amazon.com
Format: Hardcover
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.
5 of 7 people found the following review helpful
Good primer for non-finance people; fun, light mental workout for practitioners Feb. 24 2006
By Prof Steve Ahn - Published on Amazon.com
Format: Hardcover
Madden's "CFROI Valuation" is a good primer on valuation, especially for non-financial practitioners, managers, and executives of public firms who have been pounded in the last decade with the goal of maximizing shareholder value today - even at the risk of tomorrow. A cursory review of numerous other books and articles on valuation shows that the topic has become somewhat of an art-meets-science cliché. Madden provides a relatively fresh approach on the topic using the cashflow return on investment (CFROI) perspective.

Standard valuation is largely driven by a measure of cashflows, the long and short term capital investment required to achieve such cashflows, the growth and sustainability of such cashflows, and a cost of capital used to fund such activities. Here the science begins to shift into art - to determine what to do with the cashflows - usually to discount them and/or to apply some metric to arrive at value.

Similar to other widely read valuation books such as Koller's "Valuation" published by McKinsey & Co. and "Damodaran on Valuation", I would recommend this book especially to non-financial managers and executives, as an informative, introductory primer on valuation. Madden provides easy-to-understand, step-by-step guidance on valuing a company including analytical assumptions (remember the art!). Though much of the book is presumably written from the perspective of an institutional investor analyzing stocks, Madden delves into CFROI with enough breadth to make valuation and other financial professionals ponder its broader applications.

With that said, I think practitioners including investment bankers, business appraisers, and valuations consultants as well as CFO's and heads of corporate development may find Madden's "CFROI Valuation" a fun work-out of the mind. The book provides useful frameworks around which to ponder current events and trends with a less conventional valuation approach.

In dispelling traditional valuation methods and practices, Madden helps to remind, though not explicitly stating such, that formulas and technical analysis may measure value but they don't determine value.
1 of 2 people found the following review helpful
Not Very Practical March 16 2013
By Chris - Published on Amazon.com
Format: Hardcover Verified Purchase
I have read quite a few books on valuation during the last 15 years. I have studied EVA and was hoping this was insightful as well. This book ends up leaving more questions than answers. More questions than answers means lack of practical knowledge to use. If I try to explain this to a client, I will loose the relationship. Too many pages of graphs in the front of the books that are a waste of paper. Hoping this could provide help using value based management, but turned out to be a disappointment.

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