Financial Analysis: A Controller’s Guide, Second Edition

Chapter 7. Increasing Shareholder Value

The reason for the existence of a company is ultimately to increase the value of the shares held by stockholders. Given this basic underlying issue, it is reasonable that a controller will be called on from time to time to provide suggestions for how to improve the current value of these shares. This chapter covers the reasoning behind how shareholder value fluctuates, and then discusses the income statement and balance sheet to see how key parts of each one can be modified to enhance cash flow.

Linking Shareholder Value and Cash Flows

There are several theories regarding how the value of shares can be altered. This section shows how share prices can be changed in the short run by a variety of factors, but how long-term value improvements can be brought about only by improvements in a company’s cash flows.

The most recently promulgated approach for improving shareholder value is to grab as much market share as possible at whatever cost on the grounds that the company with the most customers wins. This has been a particularly powerful argument in the world of Internet stocks, where such companies as Amazon, eBay, and Yahoo! continue to post enormous losses and burn through large quantities of cash, and yet sport multibillion-dollar valuations. This is a rare situation that applies only to new industries, in which the business model that will ultimately develop is still uncertain and profits are scarce. In such a scenario, investors have little ...