Posted in Finance, Accounting and Economics Terms, Total Reads: 243
Definition: Shareholder Value
It is the value delivered to shareholders by the company’s management and the profits generated by the management are given to shareholders in form of dividends, higher growth and increase in share price. It is the ultimate measure of whether the company is enriching its shareholders or not.
To increase shareholder value, companies come up with different strategies that its management thinks would best serve the purpose. The underlying idea is to give a greater return to shareholders than what they had invested in the first place as they are ultimately the owners of the company.
Sometimes, in a bid to increase shareholder value at any cost, companies adhere to unethical practices and thereby adversely affecting the company image and leading to lower shareholder value in the long term.
The idea is to maximize shareholder’s value as far as possible.
As it is difficult to quantify, a rough figure of how a shareholder value can be calculated is given by:
Shareholder Value = Corporate Value – Debts
Shareholder Value = (NPV of all future cash flows + value of non-operating assets) – Future claims (Debts)
It is a financial parameter and fails to give a clear understanding of social issues like employment, environmental and ethical practices. Hence, a broader term is now in prevalence called Stakeholder value, where the objective is to increase value for all stakeholders of the company and not just the shareholders.