CFROI Valuation

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Summary: CFROI explains stock prices better than P/E ratios
Review: 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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Summary: The millenium stock selection model
Review: 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.