Beyond Earnings: Applying the HOLT CFROI and Economic Profit Framework

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Beyond Earnings: Applying the HOLT CFROI and Economic Profit Framework

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Beyond Earnings is targeted at investors, financial professionals, and students who want to improve their ability to analyze financial statements, forecast cash flows, and ultimately value a company. The authors demonstrate that reported earnings are easily gamed by accounting shenanigans and reveal how commonly used profitability measures such as return on equity can be misleading.

Because earnings and P/E ratios are too unreliable for valuation, this book takes you beyond earnings and shows you how to apply the HOLT CFROI and Economic Profit framework in a step-by-step manner. A better measure of profitability results in improved capital allocation decisions and fundamental valuations.

This ground-breaking book offers the first practical in-depth discussion of how profitability and growth fade, and shows how to put this information to work right away. The authors introduce their trailblazing Fundamental Pricing Model which includes fade as an adjustable value driver and can be used to value the impact of business model disruption.

As the authors explain, the key to superior stock picking is understanding the expectations embedded in a stock’s price and having a clear view of whether the company can beat those expectations. The HOLT framework has been rigorously field tested for over 40 years by global investment professionals to help them make better stock picks and by corporate managers to understand the expectations embedded in their stock price.

Beyond Earnings is an indispensable guide for investors who want to improve their odds of outperforming the competition.
Introduction xix

The Pricing Puzzle: Foundational HOLT Concept and a Key to Better Valuation xix

Overview of Book Chapters xxvi

Who Are We and What Do We Hope to Achieve xxviii

I Financial Performance Assessment

1 Never Forget the Golden Rule: Pursue Strategies with Positive NPV 3

2 The Flying Trapeze of Performance Metrics 31

3 Accounting to Cash Flow Return on Investment 57

II Discounted Cash Flow and Economic Profit Valuation

4 What's ItWorth? Valuing the Firm 113

5 Quantifying the Value and Risk of a Company's CAP 151

6 HOLT Economic Profit 191

7 Risk, Reward, and the HOLT Discount Rate 217

III Value Driver Forecasting

8 The Competitive Life-Cycle of Corporate Evolution 257

9 The Persistence of Corporate Profitability 281

10 Forecasting Growth 303

11 Evaluating Market Expectations 321

12 Closing Thoughts 359

Index 363
DAVID HOLLAND is an independent consultant who serves as a senior advisor to Credit Suisse and is an adjunct professor at the University of Cape Town Graduate School of Business. Formerly, he was a managing director at Credit Suisse based in London. David oversaw HOLT Valuation and Analytics, the research and development arm of Credit Suisse HOLT, and ran their global Custom Solutions Group.

BRYANT MATTHEWS is the senior director of research for Credit Suisse HOLT. He has over 20 years of professional experience valuing stocks and helping professional investors improve their stock selection process and valuation models. His research on understanding quality and fade has been adopted by professional investors around the world and led to numerous innovations in the flagship Credit Suisse HOLT Lens application.