Important Considerations Outside of the Framework

We have offered the DVS and return on IM framework in an attempt to help investors track management’s use of free cash flow and the balance sheet and to evaluate management’s effectiveness in serving shareholders. We offer the framework as a valuable tool rather than a “magic formula.” There are, of course, other important considerations that investors should incorporate into their analysis.

We would suggest that first among these is a need to fundamentally understand the business. An understanding of the economics and durability of competitive position is necessary in order to estimate the sustainability of results. After all, investors benefit from future free cash flow, not past results, and historical numbers are only valuable to the extent they provide insight into the future.