Total return refers to all the returns from investments. These include capital gains, interest, distribution, and dividends (Colleen M. Jaconetti, Francis M. Kinniry, and Christopher B. Philips, 2012. P. 13). Therefore, the total shareholder returns is the actual measure of the total earning from an investment. The total share returns may offer insights on the current returns, but proves to be more useful if used over a long-term period (Janet Tavakoli, n.d). It can be used to compare the rate of returns in two successive periods. The total returns offer the best single indicator on returns.
For example, assuming that a certain investor invests in a company X at a $2.5 at time t, after time t1, the share is worth $3 and the sum of the annual dividend is $0.4. The TSR shall be calculates as follows;
TSR=3-2.52.5+0.42.5=0.36=36%
These steps are summarized as follows;
- One has to decide on the time period for which to considers in the calculations
- Determine the dividends payable during the measurements period identified above
- Calculation of the accumulation factor follows assuming the dividends are reinvested.
- Find the average values of the assets at he beginning and at the end of the period selected
- Then find the product of the accumulation factor with then average asset value
- Finally calculate the TSR percent as shown above.
While calculating one has to pay attention to the fact that dividend ought to include all the other cash flows other than the regular dividends. The periods are not the same even when changed by one year. There are possible biases in some calculations. The total returns are used to determine the rate of income for an investment. It indicates the overall performance and hence is very important for management since they use the information to make decision.
References
Janet Tavakoli (n.d). Introduction to Total return Swaps. Retrieved on November 20, 2014 from http://www.tavakolistructuredfinance.com/trs/
Colleen M. Jaconetti, Francis M. Kinniry, and Christopher B. Philips, 2012. Total-return investing:An enduring solution for low yields. Retrieved on November 20, 2014 from https://personal.vanguard.com/pdf/s352.pdf
