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BCG Approach

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

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

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


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
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
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

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