1 - Overview

Abstract

This chapter provides an overview of this book that deals with cash flow return on investment (CFROI) valuation model. The CFROI measure was developed to minimize accounting distortions in measuring firms' economic performance; particularly distortions related to inflation. The principal objectives of the book are: (1) to explain in detail HOLT Value Associates' CFROI valuation model, (2) to show the CFROI model's unique benefits, and (3) to encourage more productive thinking about issues involving the management of business firms and shareholder value. The book begins by discussing connections among knowledge beliefs, actions based on them, their results, and improvement of knowledge beliefs. Actions informed by erroneous beliefs tend to produce unwanted results—that is, mistakes. Constructive skepticism combined with a process for organizing feedback is crucial to developing more-reliable knowledge. The CFROI valuation model is rooted in DCF principles: (a) more cash is preferred to less; (b) cash has a time value, sooner is preferred to later; and (c) less uncertainty is better. The firm's warranted value is driven by a forecast net cash receipt (NCR) stream which is translated into a present value by use of the investors' discount rate. The CFROI valuation model, with its CFROI performance metric, constitutes an exceptionally useful model for investors, business-firm managements, and corporate boards to gain a total system perspective on business firms' internal operations, GAAP financial statements, and the stock market's valuation of expected economic performance. By minimizing accounting distortions and adjusting for inflation, CFROIs create a level playing field for measuring firms' economic performance and gauging managerial skill.