Shareholder value analysis
Introduction:
Business nowadays is facing the problems of how to increase the benefits and values for shareholders and in the same time to satisfy the customers. Companies have to work on building profitability that will add value to the shareholders and satisfy the customers who are looking for price (Taylor et al.., N.D). It is very important to increase the shareholders wealth as they are the investors and the owners of the organizations and it is logic for them to gain high returns on their investments.
CONCEPT OF SHAREHOLDER VALUE ANALYSIS AND ECONOMIC VALUE ADDED:
Shareholder value analysis (SVA) is a type of nontraditional metrics used in business nowadays. SVA detect the financial value of an organization as it analyses the returns for the shareholders as stated above that the aim of the organization is to increase the wealth of the shareholder investments.” Shareholder value is calculated by dividing the estimated total net value of a company based on its present and future cash flows by the value of its shares of stock. The resulting figure indicates the company's value to stockholders.” (Cbsnews.com, 2007)
It is defined by Atrill (2012) as determining the shareholder’s needs within the management team, so it is important for management team to generate more profit for shareholders than the capital costs. Those benefits only occurred when equity returns exceed equity costs. The value calculated is used to measure the company performance.
Benefits of using SVA:
“Shareholder value analysis:
takes a long-term financial view on which to base strategic decisions;
offers a universal approach that is not subject to differences in companies' accounting policies and is therefore applicable internationally and across business sectors;
Forces the organization to focus on the future and its customers, particularly the value of future cash flows.” (Cbsnews.com, 2007)
Economic Value Added (EVA):
“Definition of 'Economic Value Added - EVA'
A measure of a company's financial performance based on the residual wealth calculated by deducting cost of capital from its operating profit (adjusted for taxes on a cash basis). (Also referred to as "economic profit".)
The formula for calculating EVA is as follows:
= Net Operating Profit after Taxes (NOPAT) - (Capital * Cost of Capital)” (Investopedia, 2009)
This method is depending on competitor accounting and it is become one of the best techniques for measuring wealth and financial performance of an organization. In 1990s Eva became well known to balance sheet. Well-known companies such as HP Co. began using EVA to present to the investors how much profit they gain. Also known magazines like Fortune magazine start to rank companies according to their EVA to describe the economic growth. (Shand, 2014)
Conclusion:
It is important to satisfy the shareholder’s needs. Value creation need to implement a system chosen by corporate management. Management can use the data and information from SVA and EVA to take long term decision and goals to make the required profit for shareholders. It is important to adapt the usage of the data from SVE and EVA and analyze those data to improve the company performance.
References:
Atrill, P. & McLaney, E. (2012) Management Accounting for Decision Makers. 7th ed. Harlow, England : Pearson Education Ltd.
Cbsnews.com, (2007). Implementing Shareholder Value Analysis. [online] Available at: http://www.cbsnews.com/news/implementing-shareholder-value-analysis/ [Accessed 17 Jun. 2014].
Credo Reference. (2009) Shareholder value analysis in BUSINESS: The Ultimate resource, A&C Black, London, United Kingdom. (Accessed: 13 June 2014).
Investopedia, (2009). Economic Value Added (EVA) Definition | Investopedia. [online] Available at: http://www.investopedia.com/terms/e/eva.asp [Accessed 18 Jun. 2014].
Shand, D. (2014). Economic Value Added. [online] Computerworld. Available at: http://www.computerworld.com/s/article/53001/Economic_Value_Added [Accessed 18 Jun. 2014].