A Bow Wave of Expected Economic Profits

Abstract

In Chapter 2, we established that the economic return on market value (TSR-Ke) is the fundamental determinant of whether or not wealth has been created for shareholders over a specified measurement period. We also established that (all else being equal), TSR-Ke will be positive if a company takes action that the capital market expects will enable it to deliver an economic profit stream greater than it was expecting at the beginning of a measurement period. In this chapter, we will develop these concepts a good deal further. In doing so, we will demonstrate why the use of economic performance measures is so helpful when setting out to build a truly great company with the ability to prosper well into the future. We will also demonstrate why short-termism – or the pursuit of short-term financial performance at the expense of longer-term value creation – makes no sense at all.