Financial Management

6Essential Ingredients for Value Creation: Growth and ROIC

The ultimate goal for business organizations is to create value for shareholders. Yet, many reports and analyses generated by finance do not reflect this important goal. For many decisions, the impact on shareholder value provides a terrific context and an important decision criterion. Two measures of performance that encapsulate all drivers of value creation are revenue growth and return on invested capital (ROIC).

VALUATION AND SHAREHOLDER VALUE

As the ultimate goal for business organizations is building sustainable shareholder value, it should be incorporated into essentially all reports, analyses and plans. Benefits of this focus include:

• Provides a context for business decisions.
• Highlights the importance of value creation, which is essential for the business to attract and retain capital.
• Allows business and strategic decisions to be evaluated in the context of long-term value creation.
• Facilitates the evaluation of alternative strategies and other decisions to be based on their potential to create long-term value.

In Chapter 30, we will cover valuation in great detail. A simple framework for analyzing value and linking to underlying performance is illustrated in Figure 6.1, Drivers of shareholder value. Long-term sustainable value is created by performance and expectations across six value drivers:

• Revenue growth.
• Relative pricing strength.
• Operating effectiveness.
• Capital management
• Cost of capital ...