What is 'Shareholder Value'

Shareholder value is the value delivered to shareholders because of management's ability to grow sales, earnings and free cash flow over time. A company’s shareholder value depends on strategic decisions made by senior management, including the ability to make wise investments and generate a healthy return on invested capital. If this value is created over the long term, the share price increases and the company can pay larger cash dividends to shareholders.

BREAKING DOWN 'Shareholder Value'

Increasing shareholder value increases the total amount in the stockholders' equity section of the balance sheet. The balance sheet formula is assets less liabilities equals stockholders' equity, and stockholders' equity includes retained earnings, or the sum of a company's net income less cash dividends since inception.

Factoring in Earnings Per Share

If management makes decisions that increase net income each year, the company can either pay a larger cash dividend or retain earnings for use in the business. A company’s earnings per share (EPS) is defined as earnings available to common shareholders divided by common stock shares outstanding, and the ratio is a key indicator of a firm’s shareholder value. When a company can increase earnings, the ratio increases and investors view the company as more valuable.

How Asset Use Drives Value

Companies raise capital to buy assets and use those assets to generate sales. A well-managed company maximizes the use of its assets so the firm can operate the business with a smaller investment in assets. Assume, for example, a plumbing company uses a truck and equipment to complete residential plumbing work and the total cost of these assets is $50,000. The more sales the plumbing firm can generate using the truck and the equipment, the more shareholder value the business creates. Valuable companies can generate increasing earnings with the same dollar amount of assets.

Instances Where Cash Flow Increases Value

Generating sufficient cash inflows to operate the business is also an important indicator of shareholder value, because the company can operate the business and increase sales without the need to borrow money or issue more stock. Firms can increase cash flow by quickly converting inventory and accounts receivable into cash collections. The rate of cash collection is measured by turnover ratios, and companies attempt to increase sales without the need to carry more inventory or increase the average dollar amount of receivables. A high rate of both inventory turnover and accounts receivable turnover increases shareholder value.

RELATED TERMS
  1. Shareholder Equity Ratio

    A ratio used to help determine how much shareholders would receive ...
  2. Invested Capital

    The total amount of money that was endowed into a company by ...
  3. Balance Sheet

    A financial statement that summarizes a company's assets, liabilities ...
  4. Shareholders' Equity

    A firm's total assets minus its total liabilities. Equivalently, ...
  5. Residual Dividend

    The term residual dividend refers to a method of calculating ...
  6. Shareholder

    Any person, company or other institution that owns at least one ...
Related Articles
  1. Investing

    What is the Shareholder Equity Ratio?

    The shareholder equity ratio shows how much money shareholders will receive if a company has to liquidate its assets.
  2. Investing

    Which Is Best: Cash Dividend Or Stock Dividend?

    Cash dividends are paid to shareholders when a company decides not to use the money for operations, but instead, transfer economic value to its shareholders.
  3. Investing

    How Dividends Affect Stockholders' Equity

    Find out how dividends affect a company's stockholders' equity and how the accounting process changes based on the type of dividend issued.
  4. Investing

    Who is a Shareholder?

    A shareholder is a person, company or other entity that owns at least one share of a company’s stock.
  5. Managing Wealth

    Knowing Your Rights As A Shareholder

    We delve into common stock owners' privileges and how to be vigilant in monitoring a company.
  6. Investing

    Analyze Cash Flow The Easy Way

    Find out how to analyze the way a company spends its money to determine whether there will be any money left for investors.
  7. Investing

    Analyze Cash Flow The Easy Way

    Cash flow statements reveal how a company spends its money and where that money comes from.
  8. Investing

    5 Tips For Reading A Balance Sheet

    If you know how to read it, the balance sheet provides valuable information on a potential investment.
  9. Investing

    Cheap Stocks Or Value Traps?

    The value of stocks that trade at less than cash per share can be deceiving.
  10. Investing

    The Essentials Of Corporate Cash Flow

    Tune out the accounting noise and see whether a company is generating the stuff it needs to sustain itself.
RELATED FAQS
  1. How does the bottom line affect shareholder returns?

    Understand the two factors that cause the bottom line of a company to affect the returns to its shareholders. Learn how a ... Read Answer >>
  2. How do you calculate shareholder equity?

    Find out more about shareholders' equity, what shareholders' equity measures and how to calculate a company's shareholders' ... Read Answer >>
  3. Where exactly do dividends come from?

    Learn about sources of cash dividend, such as operational, financing and investing cash flows, as well as issuances of new ... Read Answer >>
  4. Which is better a cash dividend or a stock dividend?

    The purpose of dividends is to return wealth back to the shareholders of a company. There are two main types of dividends: ... Read Answer >>
  5. Are dividends considered an expense?

    Learn how dividends are accounted for and why cash or stock dividends on common or preferred shares are not considered an ... Read Answer >>
  6. What is the impact of retained earnings on stockholders equity?

    Learn about the relationship between retained earnings and stockholders' equity for a corporation and how it is reported ... Read Answer >>
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center