Skip to content

Strategic Performance Management and Business Valuation · Economic Efficiency of the Firm - Performance Analysis

Total Shareholder Return and Other Efficiency Measures

Updated 11 October 2026 · Fact-checked

Total shareholder return (TSR) is the full return a shareholder earns over a period: share price gain plus dividends, divided by the opening price. To solve questions, compute the gain, add dividends, divide by the opening price, then compare TSR with the cost of equity or peers.

Understand Total Shareholder Return and Other Efficiency Measures

A firm is economically efficient when it earns more from its capital than the capital costs. Accounting profit alone does not show this. A company can report a profit and still destroy value if the profit is below what investors expect for the risk they take.

Total shareholder return (TSR) looks at the firm from the owner's side. It adds two things: the change in share price and the dividends received. Both are measured against the price at the start of the period. A rise in price with no dividend is still a return. A dividend with a falling price may be a loss overall.

Economic profit looks at the firm from the operating side. It is the operating profit after tax minus a charge for all capital used, at the cost of capital. If it is positive, the firm has earned more than investors required. EVA is the best-known form of economic profit.

Related ratios support the picture. ROCE and ROE show the rate of return on capital or equity. Spread is the return minus the cost of capital. Earnings per share, dividend yield and price-earnings ratio show what shareholders receive and how the market prices that. No single measure is enough, so good answers link them.

The key link: TSR above the cost of equity means shareholders gained more than they required. A positive spread or positive economic profit is the operating reason behind it. Always state which side you are measuring and compare with a benchmark.

Key rules to remember

Total shareholder return (single period)
TSR = (P₁ − P₀ + D) ÷ P₀ × 100
P₀ is opening price, P₁ closing price, D dividends received in the period.
Components of TSR
TSR = Capital gain yield + Dividend yield = (P₁ − P₀) ÷ P₀ + D ÷ P₀
Use this to show what drove the return.
Multi-year annualised TSR
Annualised TSR = [(Ending value ÷ Opening value)^(1/n) − 1] × 100
Ending value includes dividends (reinvested or added, state your assumption). n is the number of years.
Economic profit
Economic profit = NOPAT − (Capital employed × WACC)
NOPAT is operating profit after tax. Use opening or average capital consistently.
Spread
Spread = ROCE (after tax) − WACC
Economic profit = Spread × Capital employed.
Return on capital employed
ROCE = EBIT ÷ Capital employed × 100
Use NOPAT for the after-tax version when comparing with WACC.
Return on equity
ROE = Profit after tax ÷ Shareholders' equity × 100
Compare with the cost of equity.
Dividend yield and P/E
Dividend yield = DPS ÷ Market price; P/E = Market price ÷ EPS
Both use the market price, so they change with the share price.

How to solve Total Shareholder Return and Other Efficiency Measures questions

Use this order for any question on TSR, economic profit or related efficiency measures.

  1. 1Read what is asked: TSR, economic profit, a ratio, or a comparison and recommendation.
  2. 2List the data: opening and closing prices, dividends, NOPAT or EBIT, tax rate, capital employed, WACC or cost of equity.
  3. 3For TSR, compute the capital gain, add dividends, and divide by the opening price. Split it into gain yield and dividend yield if asked.
  4. 4For economic profit, compute NOPAT (EBIT × (1 − tax rate)), deduct the capital charge (capital × WACC), and read the sign.
  5. 5Compute any supporting ratios such as ROCE, spread or ROE using consistent capital figures.
  6. 6Compare with a benchmark: cost of equity, WACC, a peer or an index.
  7. 7State a conclusion in one or two lines: value created or destroyed, and the main driver.
  8. 8Write assumptions, such as dividends received at year end, so partial marks are protected.

Quickest way: Three-line TSR and economic profit check

When to use it: Use in MCQs and in the first lines of a long numerical answer when time is short.

  1. TSR: add price change and dividend, then divide by the opening price.
  2. Economic profit: multiply capital by (ROCE after tax − WACC).
  3. Sign check: TSR above cost of equity or spread above zero means value created. Confirm your answer has the same sign.

Common mistakes in Total Shareholder Return and Other Efficiency Measures

  • Dividing by the closing price instead of the opening price

    Students use the latest price because it is the one shown first.

    Fix: TSR is always measured on the amount invested at the start, so divide by P₀.

  • Leaving out dividends

    Price change feels like the whole return.

    Fix: Always add dividends received during the period to the price change.

  • Charging economic profit on EBIT instead of NOPAT

    EBIT is the figure given, and tax is forgotten.

    Fix: Deduct tax first. WACC is applied to after-tax operating profit.

  • Using the cost of equity as the capital charge on total capital

    Both rates are in the question and look alike.

    Fix: Use WACC when capital includes debt. Use cost of equity only with equity or residual income on equity.

  • Averaging yearly TSRs instead of compounding

    A simple average is quicker.

    Fix: Compound the yearly returns, or use the (ending ÷ opening)^(1/n) − 1 method.

  • Stopping at the number with no conclusion

    Students treat it as a pure calculation.

    Fix: End with a sentence comparing the result with the benchmark and saying whether value was created.

Worked examples

Example 1

A share of Kaveri Industries Ltd was priced at ₹250 at the start of the year and ₹285 at the end. It paid dividends of ₹10 per share during the year. Compute the TSR and split it into capital gain yield and dividend yield. If the cost of equity is 14%, comment.

Show the solution
  1. Capital gain = 285 − 250 = ₹35.
  2. Capital gain yield = 35 ÷ 250 = 14%.
  3. Dividend yield = 10 ÷ 250 = 4%.
  4. TSR = 14% + 4% = 18%. Check: (35 + 10) ÷ 250 = 45 ÷ 250 = 18%.
  5. Compare: 18% is above the cost of equity of 14%.

Answer: TSR is 18% (14% capital gain yield plus 4% dividend yield). It exceeds the 14% cost of equity by 4 percentage points, so shareholders earned more than they required and value was created.

Example 2

Meghna Textiles Ltd has capital employed of ₹50,00,000 at the start of the year. EBIT is ₹9,00,000 and the tax rate is 25%. WACC is 12%. Compute NOPAT, the capital charge, economic profit, after-tax ROCE and spread, and comment.

Show the solution
  1. NOPAT = 9,00,000 × (1 − 0.25) = ₹6,75,000.
  2. Capital charge = 50,00,000 × 12% = ₹6,00,000.
  3. Economic profit = 6,75,000 − 6,00,000 = ₹75,000.
  4. After-tax ROCE = 6,75,000 ÷ 50,00,000 = 13.5%.
  5. Spread = 13.5% − 12% = 1.5%.
  6. Check: 1.5% × 50,00,000 = ₹75,000, which matches.

Answer: Economic profit is ₹75,000. After-tax ROCE is 13.5% against WACC of 12%, a spread of 1.5%. The firm earns more than its capital costs, so it creates value, though the margin is thin.

Exam tips

  • In MCQs, check whether the question gives dividends. If it does, the answer almost always needs them added.
  • In case questions, show the formula line, then the substitution, then the result. Marks are given for each.
  • Always write a one-line conclusion comparing with cost of equity, WACC or a peer.
  • State your assumption on opening, closing or average capital before you use it.
  • When asked to evaluate efficiency, link TSR (shareholder view) to economic profit or spread (operating view).

Practice questions from Economic Efficiency of the Firm - Performance Analysis

Total Shareholder Return and Other Efficiency Measures: frequently asked questions

What is the formula for total shareholder return?

TSR = (closing price − opening price + dividends) ÷ opening price × 100. It combines capital gain and dividend yield. Use it for one period, and compound for several years.

How is economic profit different from accounting profit?

Accounting profit deducts only interest and other recorded costs. Economic profit also deducts a charge for the cost of all capital, including equity. A firm can have accounting profit and negative economic profit.

Is TSR the same as EVA?

No. TSR is a market-based return to shareholders over a period. EVA is an accounting-based measure of operating value created. A firm with strong EVA often delivers good TSR over time, but the two can differ in a given year.

Which benchmark should I compare TSR with?

Compare with the cost of equity, a market index or peer companies, depending on what the question gives. State the benchmark you use and say whether TSR is above or below it.