In Chapter 1, we introduced the fundamental principles of corporate finance.
Companies create value by investing capital to generate future cash flows at
rates of return that exceed their cost of capital. （基础的一个概念，公司的价值创造来源于资本投资产生的现金流，当然回报率要在资产成本之上，这个也是公司估值适用现金贴现模型的前提）

The faster they can grow and deploy more capital atattractive ratesof return,the more value they create.The
mix of growth and return on invested capital(ROIC) relative to the cost of capi-tal is what drives the creation of value. Acorollary of this principle is the conservation of value: any action that doesn’t increase cash flows doesn’t create value.
（一个推论：根据价值保存的原则，任何不增加现金流的行为，就不会创造出价值）

The principles imply that a company’s primary task is to generate cash
flows at rates of return on invested capital greater than the cost of capital.
Following these principles helps managers decide which investments will create the most value for shareholders in the long term. The principles also help investors assess the potential value of alternative investments.
（跟随原则而为的话，经理和投资者都能更好的判断投资行为的价值所在，或者说潜在价值）

Managers and investors alike need to understand in detail what relationships tie together cash flows, ROIC, and value;
（经理们，投资者都需要深入地理解现金流，资产回报率，和价值之间的联系）

what consequences arise from the conservation of value; and how to factor any risks attached to future cash flows into their decision making. These are the main subjects of this chapter. The chapter concludes by setting out the relationships between cash flows, ROIC, and value. in the key value driver formula—the equation underpinning discounted cash flow(DCF) valuation in boththeory and practice.
（本章的主题就是要揭示现金流，资产回报率，和价值之间的联系，在价值驱动的公式中，dcd估值模型是关键）

GROWTH AND ROIC: DRIVERS OF VALUE

Companies create value for their owners by investing cash now to generate  more cash in the future. The amount of value they create is the difference



（上图揭示了价值的构成和来源）

between cash in flows and the cost of the investments made,adjusted to reflect
the fact that tomorrow’s cash flows are worth less than today’s because of
the time value of money and the riskiness of future cash flows. As we will
demonstrate later in this chapter,a company’s return on invested capital and its
revenue growth together determine how revenues are converted to cash flows.
That means the amount of value a company creates is governed ultimately by
its ROIC, revenue growth, and of course its ability to sustain both over time.

（价值的多少取决于资产回报率，应收增长和能持续保持前两者增长的能力）

Exhibit2.1 illustrates this core principle of value creation.
One might expect universal agreement on a notion as fundamental as
value,but this isn’t the case:many executives,boards,and financial media still
treat accounting earnings and value as one and the same, and focus almost
obsessively on improving earnings. However, while earnings and cash flow
are often correlated, earnings don’t tell the whole story of value creation, and
focusing too much on earnings or earnings growth often leads companies to
stray from avalue-creating path.

（上面的图例 ex2.1 说明了价值创造的原则和路径。收入未必能包含企业状况的全部细节，而且只是一味关注收入，会让公司远离价值创造的道路）


For example, earnings growth alone can’t explain why investors in drug-
store chain Walgreens, with sales of $54 billion in 2007, and global chewing-
gum maker Wm. Wrigley Jr. Company, with sales of $5 billion the same year,

earned similar shareholder returns between 1968 and 2007. These two suc-
cessful companies had very different growth rates. During the period, the
net income of Walgreens grew at 14 percent per year, while Wrigley’s net in-
come grew at 10 percent per year. Even though Walgreens was one of the
fastest-growing companies in the United States during this time, its average
annual share holder returns were 16 percent,compared with17percent for the
significantly slower-growing Wrigley.The reason Wrigley could create slightly
more value than Walgreens despite 40 percent slower growth was that it earned a 28 percent
ROIC, while the ROIC for Walgreens was 14 percent (a good rate for a retailer).
To be fair, if all companies in an industry earned the same ROIC, then
earnings growth would be the differentiating metric. For reasons of simplic-
ity, analysts and academics have sometimes made this assumption, but as
Chapter4 will demonstrate,returns on invested capital can vary considerably,
even between companies within the same industry.

（举例解析资产回报率和收入增长率对于公司不同意义，资产回报率要优于收入增长率）

Relationship of Growth, ROIC, and Cash Flow

Disaggregating cash flow into revenue growth and ROIC helps illuminate
the underlying drivers of a company’s performance. Say a company’s cash
flow was $100 last year and will be $150 next year. This doesn’t tell us much
about its economic performance, since the $50 increase in cash flow could
come from many sources, including revenue growth, a reduction in capital
spending,or a reduction in marketing expenditures.But if we told you that the
company was generating revenue growth of 7 percent per year and would earn
a return on invested capital of 15 percent, then you would be able to evaluate
its performance. You could, for instance, compare the company’s growth rate
with the growth rate of its industry or the economy,and you could analyze its
ROIC relative to peers,its cost of capital, and its own historical performance.

Growth, ROIC, and cash flow are tightly linked. To see how, consider two
companies, Value Inc. and Volume Inc., whose projected earnings and cash
flows are displayed in Exhibit2.2. Both companies earned $100million in year
1 and increased their revenues and earnings at 5 percent per year, so their
projected earnings are identical. If the popular view that value depends only
on earnings were true,the two companies’values also would be the same.But
this simple example illustrates how wrong that view can be.

（现金流细化成营收增长率和资产回报率会更好解释公司的业绩增长的基础. 现金流的增长的因素会有不少，比如营收增长，减少资产投资，营销费用等。营收增长率，资产投资回报率和现金流是非常紧密联系在一起的。例子会说明一个情况：只用收入去估值公司会错得很离谱）

Value Inc. generates higher cash flows with the same earnings because it
invests only 25 percent of its profits (making its investment rate 25 percent)
to achieve the same profit growth as Volume Inc., which invests 50 percent of
its profits. Value Inc.’s lower investment rate results in 50 percent higher cash
flows than VolumeInc. obtains from the same level of profits.



（value公司在一样的营收前提下却有更高的现金流，这个是因为value公司有 25%投资率，而volume公司却用了50%率）



We can value the two companies by discounting their future cash flows
at a discount rate that reflects what investors expect to earn from investing
in the company—that is, their cost of capital. For both companies, we dis-
countedeachyear’scashflowtothepresentata10percentcostofcapitaland
summed the results to derive a total present value of all future cash flows:
$1,500 million for Value Inc. (shown in Exhibit 2.3) and $1,000 million for
Volume Inc.
The companies’ values can also be expressed as price-to-earnings ratios
(P/Es). To do this, divide each company’s value by its first-year earnings of
$100 million. Value Inc.’s P/E is 15, while Volume Inc.’s is only 10. Despite
identical earnings and growth rates, the companies have different earnings
multiplesbecause theircash flows are so different.

(我们用dcf估值模型来评估这2加公司未来现金流，也就是他们的资产成本）

Value Inc. generates higher cash flows because it doesn’t have to invest
as much as Volume Inc., thanks to its higher rate of ROIC. In this case, Value
Inc. invested $25 million (out of $100 million earned) in year 1 to increase its
revenues and profits by $5 million in year2. Its return on new capitalis 20 per-
cent($5milli on of additional profits divided by $25million of investment). In contrast, Volume Inc.’s return on invested capital is 10 percent ($5 million in
additional profits in year2 divided by an investment of$50 million).

（因为有相对高的资产回报率，value公司可以拥有更高的现金流而不用投入和volume公司一样多的资产。）

Growth, ROIC, and cash flow (as represented by the investment rate) are together mathematically inthe following relationship:

Investment Rate = Growth÷Return on Invested Capital
applying that formula to Value Inc.,

25% = 5%÷20%


Applying it toVolume Inc.,
50% = 5%÷10%

Since the three variables are tied together, you only need two to know
the third, so you can describe a company’s performance with any two of the
variables.

Balancing ROIC and Growth to Create Value

Exhibit 2.4 shows how different combinations of growth and ROIC translate
into value. Each cell in the matrix represents the present value of future cash
flows under each of the assumptions of growth and ROIC, discounted at the
company’s cost of capital.In this case,we’reassuming a 9 percent cost of capital
and a company that earns $100 in the first year.

Using this simple approach, we get real-world results. Take the typical
large company, which grows at about 5 to 6 percent per year (nominal), earns
about a 13 percent return on equity,and has a 9 percent cost of capital.Finding
the intersection of the typical company’s return leads you to a value of $1,500
to$1,600.Dividing this value by earnings of $100 results in a price-to-earnings
ratio of 15t o 16 times—and 15 times is the median P/E for large U.S.companies
outside of a recession.

Observe that for any level of growth, value increases with improvements
in ROIC. In other words, when all else is equal, a higher ROIC is always
good. The same can’t be said of growth. When ROIC is high, faster growth
increases value, but when ROIC is lower than the company’s cost of capital,
faster growth necessarily destroys value,making the point where ROIC equals
the cost of capital the dividing line between creating and destroying value
through growth.On the line,value is neither created nor destroyed,regardless
of how fast the company grows.

(在其他变量一致的前提下，更好的资产回报率会是件好事！但是，增长率就不能这么下结论了。当资产回报率大于资产成本的时候，快速的增长率会创造价值，但是当资产回报率小于资产成本的时候，快速的增长率会破坏价值。当资产回报率等于资产成本的时候，就会形成一条分界线，在这一线上，不管这个公司扩张多快，价值会在创造和破坏之间徘徊）

We sometimes hear the argument that even low-ROIC companies should
strive for growth, because if a company grows, its ROIC will naturally in-
crease.However,we find this is true only for young,start-upbusinesses.Most
often in mature companies, a low ROIC indicates a flawed business model or
unattractive industry structure.

Real-World Evidence

The logic laid out in this section is reflected in the way companies perform
in the stock market. Recall the earlier explanation of why shareholder returns
for Walgreens and Wrigley were the same even though earnings for Walgreens
grew much faster. General Electric (GE) provides another example of the rel-
ative impact of growth and ROIC on value. GE’s share price increased from
about$5 in 1991 to about  $40 in 2001,earning investors $519 billion from the in- crease
in share value and distributions during the final 10 years of JackWelch’s tenure as CEO.
A similar amount invested in the S&P 500 index would have returned only $212 billion.

How did GE do it? Its industrial and finance businesses both contributed
significantly to its overall creation of value, but in different ways. Over the
10-yearperiod,the industrial businesses increased revenues by only 4 percent
a year (less than the growth of the economy), but their ROIC increased from
about 13 percent to 31 percent. The finance businesses performed in a more
balanced way, demonstrating growth of 18 percent per year and increasing
ROIC from 14 percent to 21 percent. In the industrial businesses,ROIC was the
key driver of value, while in the financial businesses, improvements in both
growth and ROIC contributed significantly to value creation.

（通过GE的例子来说明资产回报率对创造价值的贡献！世界最成功的企业，通用电气(GE)，在杰克韦尔奇的10年统治期, 营收增长率只有4%，甚至低于当时经济增长率。但是GE的资产回报率却从13% 增长到了31%。相对之下，工业行业更依仗资产回报率，金融行业的资产回报率和增长率比较平衡，2者同时增长对于价值创造意义重大！）

Clearly,the core valuation principle applies at the company level.We have
found that it applies at the sector level,too.Consider companies as a whole in
the consumer packaged-goods sector. Even though well-known names in the
sector such as Procter & Gamble and Colgate-Palmolive aren’t high-growth
companies,the market values them a thigh earnings multiples because of their
high returns oninvestedcapital.

（估值方法不仅在企业层面有着成功的应用，也可以应用部门级别）

The typical large packaged-goods company increased its revenues only
6 percent a year from 1998 to 2007, slower than the average of about 8 percent
for all large U.S.companies.Yet at the end of2007(beforethemarketcrash),the
medianP/Eofconsumerpackaged-goods companies   was about20,compared
with 17 for the median large company. The high valuation of companies in
this sector rested on their high ROICs—typically above 20 percent, compared
with ROIC s averaging 13 percent for the median large company between1998
and 2007.

（回顾和对比了历史上优良大企业的资产回报率）

Another example that underlines the point is a comparison of Campbell
SoupCompany ($8billionin2008revenues) withfast-growing discount retailer
Kohl’s (revenues of $16 billion in 2008). In the middle years of the decade,
revenues for Kohl’s grew 15 percent annually, while Campbell achieved only
4 percent in annual organic growth. Yet the two companies had similar P/Es.
Campbell’s high ROIC of 50 percent made up for its slower growth; Kohl’s
ROIC averaged only15 percent.

To test whether the core valuation principle also applies at the level of coun-
tries and the aggregate economy, we asked why large U.S.-based companies
typically trade at higher multiples than large companies in the more developed

Asian countries of Hong Kong, South Korea, Taiwan, and Singapore. Some
executives assume the reason isthat investors are simply willing to pay higher
prices for U.S. companies (an assumption that has prompted some non-U.S.
companies to consider moving their share listing to the New York Stock Ex-
change in an attempt to increase their value).ButtherealreasonU.S.companies
trade at higher multiples is that they typically earn higher returns on invested
capital. The median large U.S. company earned a 16 percent ROIC in 2007,
while the median large Asian company earned 10 percent. Of course, these
broad comparisons hide the fact that some Asian sectors and companies—for
example, Toyota in automobiles—outper form their U.S. counterparts. But for
the most part, Asian companies historically have focused more on growth
than profitability or ROIC, which explains the large difference between their
averagevaluationand thatofU.S. companies.

（吐槽了一下亚洲企业只关心增长率，忽视利润，无视资产回报率）

More evidence showing that ROIC and growth drive value is presented in
Chapters15and 16.

Managerial Implications


We’ll dive more deeply into the managerial dimensions of ROIC and growth in Chapters 4 and 5, respectively.
For now, we outline several lessons managers should learn for strategic decision making.
Start by referring back to Exhibit2.4, because it contains the most important
strategic insights for managers concerning the relative impact that changes in
ROIC and growth can have on a company’s value. In general, companies
already earning a high ROIC can generate more additional valueby increasing
their rate of growth, rather than their ROIC, while low-ROIC companies will
generate relatively more value by focusing on increasing their ROIC.


（相对之下，拥有高资产回报率的公司，容易就可以通过提高增长率来创造价值，而低资产回报率的公司专注在提升本身的资产回报率，而不是一味提高增长率，将会是更好的选择，资产回报率是向管理要价值，增长率是粗放地增长）


For example, Exhibit 2.5 shows that a typical high-ROIC company, such
as a branded consumer packaged-goods company, can increase its value by
10 percent if it increases its growth rate by one percentage point,while a typical
moderate-ROIC company, such as the average retailer, will increase its value
by only 5 percent for the same increase in growth. In contrast, the moderate-
ROIC company gets a 15 percent bump in value from increasing its return on
invested capital by one percentage point, while the high-ROIC company gets
only a 6 percent bump from the same increase in return on invested capital.


（图例2.5 展示了以下的对比：一家大型超商，拥有高的资产回报率，只要他提升1%的增长率，就能获得10%的新增价值。
而一家只有平均水平的超商，在平等条件下，只能获得一半的价值。）


The general lesson is that high-ROIC companies should focus on growth,
while low-ROIC companies should focus on improving returns before grow-
ing. Of course, this analysis assumes that achieving a one percentage point
increase in growth is as easy as achieving a one percentage point increase in
ROIC, everything else being constant. In reality, achieving either type of in-  
crease posesdifferent degrees of difficulty for different companies in different
industries, and the impact of a change in growth and ROIC will also vary
between companies. However, every company needs to make the analysis in
order to setits strategicpriorities.
（资产回报率存在边际回报区间，在到达一定区间之前，要优先发展资产回报率，当资产回报率达到一定的程度，增长率带来的边际新增价值要大大高于资产回报率


Until now, we have assumed that all growth earns the same ROIC and
therefore generates the same value, but this is clearly unrealistic: different
types of growth earn different degrees of return. so not all growth is equally
value-creating. Each company must understand the pecking order of growth-
related value creation that applies to its industry and company type.


（真实的实际不会是数据化的，每个行业特性和企业种类决定了各自的资产回报率和增长率之间的关系）

Exhibit 2.6 shows the value created from different types of growth for a
typical consumer products company. These results are based on cases with
which we are familiar, not on a comprehensive analysis, but we believe they
reflect the broader reality. The results are expressed in terms of value created
for $1.00 of incremental revenue. For example, $1.00 of additional revenue
from a new product creates $1.75 to $2.00 of value. The most important
implication of this chart is the rank order.New products typically create more
value for shareholders,while acquisitions typically create the least.
The key to the difference between these extremesis differences in ROICs for the different
types of investment.


Growth strategies based on organic new product development frequently
have the highest returns because they don’t require much new capital; com-
panies can add new products to their existing factory lines and distribution
systems. Furthermore, the investments to produce new products are not all
required at once. If preliminary results are not promising, future investments
can be scaledback orcanceled.


Acquisitions, by contrast, require that the entire investment be made up
front. The amount of up-front payment reflects the expected cash flows from
the target pl premiumus a to stave off other bidders. So even if the buyer can
improvethetargetenoughtogenerateanattractiveROIC,therateofreturnis
typicallyonly asmall amounthigher than itscostofcapital.


（展示了各种企业行为给价值创造带来的边际效应）

To be fair,this analysis doesn’t reflect the risk of failure.Most product ideas
fail before reaching the market, and the cost of failed ideas is not reflected in
the numbers. By contrast, acquisitions typically bring existing revenues and
cash flows that limit the downside risk to the acquirer. But including the risk
of failure would not change the pecking order of investments from a value-
creation view point. 、

（公平地说，上述的分析并没有涉及到失败的风险. 大多数创意产品不会出现在市场上，而研发这些创意的成本不会反应在上述的数字中。相反的，并购会带来直接的收入和现金流，然而即使考虑到风险因素，上述的强弱次序不会改变）

The interaction between growth and ROIC is a key factor to consider when
assessing the likely impact of a particular investment on a company’s overall
ROIC. For example, we’ve found that some very successful, high-ROIC com-
panies in the United States are reluctant to invest in growth if it will reduce
their ROICs. One technology company had 30 percent operating margins and
a50+percent ROIC,so it didn’t want to invest in projects that mightearnonly
25 percent returns,fearing this would dilute its average returns.

（在评估某个投资对公司整体影响的时候，增长率和资产回报率之间的互动是一个关键因素。举例来说，在美国，拥有着高资产回报率的成功的企业，通常不会牺牲资产回报率来换取增长率）

But as the first principle of value creation would lead you to expect, even a 25 percent return
opportunity would still create value as long as the cost of capital was lower,
despite the resulting decline in average ROIC. The evidence backs this up.
We examined the performance of 78 high-ROIC companies(greaterth an 30percent ROIC)from1996to2005. Not surprisingly,
the companies that created the most value(measured by total returns to share-
holders over the 10 years) were those that grew fastest and maintained their
highROICs.But these cond-highest value creators were those that grewf astest
even though they experienced moderate declines in their ROICs. They created
more value than companies that increased their ROICs but grew slowly.


We’ve also seen companies with low returns pursue growth on the assump-
tion that this will also improve their profit margins and returns,reasoning that
growth will increase returns by spreading fixed costs across more revenues.

As we mentioned earlier in this chapter, however, except for small start-up
companies,faster growth rarely fixes a company’sROIC problem.Low returns
usually indicate a poor industry structure (e.g., airlines), a flawed business
model, or weak execution. If a company has a problem with ROIC, the com-
pany shouldn’t grow until the problemis fixed.

（在得到优秀的资产回报率之前，公司最好放慢成长的步伐）

The evidence backs this up as well. We examined the performance of 64
low-ROIC companies from 1996 to 2005. The companies that had low growth
but increased their ROICs out performed the faster-growing companies that
did notimprove their ROICs.