Publicly traded companies place great importance on their stock share price, which broadly reflects a corporation’s overall financial health. As a rule, the higher a stock price is, the rosier a company’s prospects become.
Analysts evaluate the trajectory of stock prices in order to gauge a company’s general health. They likewise rely on earning histories, and price-to-earnings (P/E) ratios, which signal whether a company’s share price adequately reflects its earnings. All of this data aids analysts and investors in determining a company’s long-term viability.
- A company's stock price reflects investor perception of its ability to earn and grow its profits in the future.
- If shareholders are happy, and the company is doing well, as reflected by its share price, the management would likely remain and receive increases in compensation.
- The prevention of a takeover is another reason that a corporation might be concerned with its stock price.
- If a company's stock price is performing well along with the company, the company is likely to receive more favorable press from analysts and the media.
Most companies receive an infusion of capital during their initial public offering (IPO) stages. But down the line, a company may rely on subsequent funding to finance expanded operations, acquire other companies, or pay off debt. This can be achieved with equity financing, which is the process of raising capital through the sale of new shares. However, for this to happen, the company must demonstrate a healthy share price, in order to project an attractive outlook to potential new investors.
A company should be careful not to over-issue new shares, because an overabundance of shares circulating in the market may diminish demand, where there’s simply not enough buyers to gobble up the shares, which could ultimately depress the stock price.
Furthermore, creditors favor companies with higher-priced shares, which typically correlate with a company's earnings. Such healthy companies are better able to pay off long-term debt, which usually means they’ll attract lower-interest-rate loans, which consequently strengthens their balance sheets.
A Performance Indicator of Executive Management
Investment analysts ritually track a publicly-traded company's stock price in order to gauge a company's fiscal health, market performance, and general viability. A steadily rising share price signals that a company's top brass is steering operations toward profitability.
Furthermore, if shareholders are pleased, and the company is tilting towards success, as indicated by a rising share price, C-level executives are likely to retain their positions with the company. Such senior personnel are also likely to enjoy salary raises and yearly bonuses.
Conversely, if a company is struggling, as reflected by a dwindling share price, a company's board may decide to fire its top operatives. Simply put, falling share prices do not bode well for a company's higher-ups.
Compensation likewise represents a critical rationale for a company's decision-makers to do everything in their power to make sure a corporation's share price thrives. This is because many of those occupying senior management positions derive portions of their overall earnings from stock options. These perks afford management personnel the ability to acquire shares of the corporation at a determined price, on a future set date.
But for the option to increase in worth, the underlying stock price must flourish. For this reason, the existence of stock options is vitally important to stimulating a company's health. Otherwise put, executives stand to personally gain when they make strategic decisions that benefit a company's bottom line, which ultimately helps stockholders grow the value of their portfolios.
Risk of Takeover
The prevention of a takeover is another reason a corporation might be concerned with its stock price. When a company's stock price falls, the likelihood of a takeover increases, mainly due to the fact that the company's market value is cheaper.
Shares in publicly traded companies are typically owned by wide swaths of investors. Therefore, bidders who seek to take over a company by obtaining a majority of shares can more easily afford to do so when the stock is trading at a lower price.
Consequently, management strives to keep the share price high in order to discourage this activity. Conversely, a company whose shares trade for high prices are better positioned to take over a competitive interest.
Companies with high share prices tend to attract positive attention from the media and from equity analysts. The larger a company's market capitalization, the wider the coverage it receives. This has a chain effect of attracting more investors to the company, which infuses it with the cash it relies on to flourish over the long haul.