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Crunching the Numbers

Looking at how companies vary across the market when it comes to excess returns may provide you with insight into what characterizes good companies. You will begin by looking at the distribution of excess returns and economic value added across companies in the United States. You will then consider alternative measures of company quality and the companies that make the list with each measure.

Across the Market

The financial indicator that is most closely tied to the quality of a company's management is excess return earned by the company on its investments, that is, the difference between the return on invested capital and the cost of raising that capital. Embedded in this measure are all aspects of management. The capacity to make good investments is reflected in the return on capital, and the optimal use of the different sources of capital should result in a lower cost of capital.


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