The term 'Shareholder Value' is included in the Corporate Finance edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Choose your edition here...
Shareholder Value refers to the value of a company which stakeholders in the firm enjoy as a direct result of management growing revenues, earnings, and free flow cash in time. The actual value of any company comes down to the effects and results of the strategic choices that senior management makes and carries out for a firm. This includes both strong returns on their invested capital positions as well as making solid investments.
As value is built up over the longer term time frame, the price of the shares goes up and the company is able to pay out bigger cash dividends to its various stake holders. Unfortunately, the opposite is also true; share prices can fall while dividends can sometimes be cut out of dire necessity. Rising dividends is usually the sign of a healthy and growing company, while falling dividends are a sign of a weakening and sick firm.
The balance sheet of a given company will reflect a higher and growing shareholder value. This is tallied in the equity section on the corporate balance sheet. The formula for this balance sheet is stockholder’s equity equates to the company assets minus the corporate liabilities. Stakeholder equity also includes retained earnings. These are the company’s sum of all net income minus the cash dividends from the inception of the firm.
When the management of a company in question affects strong strategic choices which boost company earnings every year, the firm will gain the ability to either keep higher retained earnings to build up the business organically or to dole out a bigger cash dividend to its shareholders.
The EPS earnings per share of a firm can be appropriately defined as the earnings available to the shareholders divided up by the number of shares of common stock which are outstanding. This ratio proves to be the primary indicator of the shareholding value of a corporation. As the firm grows its earnings then such a ratio will also increase. It will cause the corporation to be looked on more favorably and valuably by investors.
Corporations have to raise significant amounts of capital in order to purchase assets. They utilize said assets to generate revenues. Corporations which are effectively managed optimize their asset use in order to run the business with lesser investments in the assets. Take a concrete example to help understand this challenging concept. A plumbing firm may utilize both a truck and equipment in order to finish a residential plumbing job. The full cost of such assets amounts to $100,000. The higher the sales which the plumbing firm is capable of generating with the truck and plumbing equipment, the greater the shareholder value the company will create for its stakeholders. Companies which are valuable are able to generate higher and higher earnings using the identical amount of dollars in assets.
It is also true that creating enough cash inflows is necessary to run the business with solvency. This represents a critical shareholder value indicator. It also allows the firm to operate its company and grow the sales without having to resort to issuing additional shares of stock or borrowing additional sums of money from bondholders or alternatively from banks. Such firms are able to rapidly boost their cash flow through effectively collecting on their accounts receivables and quickly converting their existing inventory into sales.
This is why the rate of cash collection is so very important to any firm. It can be quantified via turnover ratios. Corporations will try to boost their sales without having to order and hold greater amounts of inventory or without needing to boost the typical dollar amount in actual receivables. A larger rate of accounts receivable turnover and inventory turnover will result in building up the share holders’ value with time.