doesn t reflect size of investment
tsr is best used when analyzing venture capital and private equity investments these investments typically involve multiple cash investments over the life of the business and a single cash outflow at the end through an initial public offering ipo or sale because tsr is expressed as a percentage the figure is readily comparable with industry benchmarks or companies in the same sector however it reflects the past overall return to shareholders without consideration of future returns tsr represents an easily understood figure of the overall financial benefits generated for stockholders the figure measures how the market evaluates the overall performance of a company over a specific time period however tsr is calculated for publicly traded companies at the overall level not at a divisional level also tsr works only for investments with one or more cash inflows after purchase in addition tsr is externally focused and reflects the market s perception of performance therefore tsr could be adversely affected if a fundamentally strong company s share price suffers greatly in the short term for whatever reason like negative publicity or quirky stock market behavior or sentiment tsr does not measure the absolute size of an investment or its return for this reason tsr may favor investments with high rates of return even when the dollar amount of the return is small for example a 1 investment returning 3 has a higher tsr than a 1 million investment returning 2 million also tsr cannot be used when the investment generates interim cash flows in addition tsr does not take into consideration the cost of capital and cannot compare investments over different time periods 