This is a book without any theoretical or doctrinal claim. It only tries to bring together all those shareholders, managers, professionals and the general public, the key concepts related to value creation, the measurement of said value creation and the strategies that allow companies to create value; as well as offering answers to the following questions:
strategies-and-measurement-of-value-for-the-shareholder- What is meant by management oriented to value creation? What is value creation? How can a business be valued? What techniques or methods are used in professional practice for business valuation? What indicators Can they be used to measure the creation of value in the company? What can we do, as shareholders and / or managers, to create value in our companies? What strategies are appropriate to create value and which are not?
We have tried to use a language understandable by people who are not experts in these subjects, although sometimes it is difficult to abstract from their complexity and, inevitably, some technicalities have had to be used.
Above all, we have tried to make this a very practical book (with a multitude of solved cases); without entering into theoretical discussions on the concept of value creation, the measures used in professional practice to measure value creation and the strategies for achieving said value creation; and that these themes go a long way in this regard. It's that simple and that complex at the same time.
To the extent that this book contributes to bringing these issues closer to shareholders, managers, business professionals and the general public, we will have been successful; and if we have made it easy, much better.
INTRODUCTION
A few years ago, the accounting results were sufficient for daily management and decision-making in companies. However, every day more importance is given to “value” and to the knowledge and application of value creation measures and, consequently, to the ability to manage such value creation.
The concept of value creation (1) is, in essence, truly simple: a company creates value for its shareholders when the return obtained on the invested capital is higher than the cost of said capital.
One of the approaches developed as a result of this concept focuses on the strategic and operational management of the company under criteria of value creation for the shareholder. This management and its medium and long-term consequences will inevitably have its reflection on the value of the company. The creation of value for the shareholder thus considered has as its starting point the concept of the company's market value (both in listed and unlisted companies) and its estimation through the discounting of cash flows. This approach lays the necessary foundations to achieve rigorous control by managers and to enhance the solid growth and development of companies.
Investors are not only looking for rewards in the form of dividends and in the form of increased share values, but they also want long-term growth prospects for the company.
WHAT IS UNDERSTOOD BY MANAGEMENT ORIENTED TO THE CREATION OF VALUE?
The basic idea of value-based management starts from the premise that the objective of the financial function is to maximize the value of the investment of the shareholders.
Precisely because all financial theory has been developed around the objective of maximizing value, it is perfectly demonstrable that the best value management consists in applying the known principles of sound financial policy in the daily management of operations, in the analysis of investments, in debt policies and in dividends, as well as in the tactical execution of said policies.
WHAT DO WE UNDERSTAND BY VALUE?
The value depends only on what we expect to happen in the future with the good or service that we intend to value and on our expectations.
The problem of the future is that we do not know it with certainty; so any valuation of future events must take into account the risk factor. In most practical applications of value-based management, the net present value (NPV) criterion of cash flow (cash flow) arising from a particular decision or management action is by definition the measure of value created for this decision. In relation to VAN we have to make two considerations:
- Due to both the time factor and the risk factor, the only amounts of money for which current values can be calculated using discount procedures are the amounts of money that remain available, which are called cash flows. it is exclusive of investments. It can be applied to any flow of funds. If the net present value associated with a certain action is positive, by the generic definition of current value we can affirm that said action creates value for the company and the created value is the net present value of said action. Some basic premises to understand the management oriented to the creation of value for the shareholder are the following:
- Management is obligated to create value for investors. • Investors invest in a company because they expect a return on their investment. Investors expect a minimum level of return on their investment which is called the cost of capital. A company that does not It creates long-term value in the sense that it offers a return below the cost of capital that is economically unacceptable, especially from the perspective of the shareholders. Investors can withdraw their funds from the company from the moment they have other alternative investments of higher profitability (opportunity cost).
10 KEY CONCEPTS TO UNDERSTAND THE CREATION OF VALUE
In order to better understand the expression "value creation", we will try to explain in 10 key concepts what we must understand by value creation.
- The ultimate goal of creating shareholder value, which is to maximize their wealth, seems dominant in today's business environment. This objective summarizes the rest of the economic-financial objectives related to profitability, growth, liquidity, the financing structure and risk, since all of them contribute to that end. Creating shareholder value is the objective of the financial function. Now, what are the main parameters that explain this objective? Summarizing a lot, we could say that they are the investment decision making, financing decisions and the dividend distribution policy that is practiced, as well as the demands for profitability of the shareholders and the level of risk.
- The intrinsic or theoretical value of any company depends on the future cash flows that it is estimated to generate, that is, on its expectations; therefore, value creation depends on those expectations. To measure the value created over a period of time by a company, it is necessary to estimate its value at the end and at the beginning of it.
- Value and value creation are not equivalent concepts. A company may have a high value compared to other companies in the sector or with respect to its book values and, nevertheless, be destroying said value and vice versa. To create value, the return obtained by the shareholders (K real) must exceed the return required (K required), expressing this as the return they could obtain in investment alternatives of similar risk. To estimate the created value it is necessary to clearly measure:
- Shareholder performance, which has nothing to do with traditional concepts of profitability calculated from accounting information (for example: ROE or financial profitability). The profitability required by shareholders (or the cost of capital of the company).
Based on this reasoning, we can conclude that creating value requires that the shareholder's profitability exceed the cost of capital of the own funds.
- What determines the creation of value for the shareholder is not exactly the improvement of the company's situation, as is frequently stated, but rather that the return obtained from the company's investments is capable of exceeding its expectations; regardless of whether this progress is materialized in the accounting results of the period analyzed, it is common for companies to seek to increase net profit, since they consider that they create value for their shareholders. The way to increase it can come through growth, diversification, the improvement of productive efficiency, the acquisition of other companies, etc. However, increasing profit does not guarantee creating value. This uneven behavior of profit and value creation is evident, for example, when a company correctly increases the costs of strategic development of the activity related to innovation, technological development, the improvement of its processes, the enhancement of your brand, customer service, quality or training: your short-term benefit decreases, but at the same time, your value must be increased as a reflection of the expected improvement in your competitive position (improvement of future expectations)). A similar discrepancy occurs when, for example, a company does not liquidate or sell one of its businesses that is destroying value because it would cause an accounting loss.
- For many decades, the value criterion has been used systematically in business decision-making and, specifically, in the evaluation of investments. In this sense, the net present value (NPV) of a project that measures the value that its execution is expected to create, is a financial evaluation criterion widely used by companies.
- The method applicable to any company or asset to estimate its value is to calculate the updated value of the future monetary income that is expected to be generated for its owner. This method, known as “ flow discounting ”, was introduced by the Nobel laureates Modigliani and Miller in 1961. The difficulty of this valuation method stems from the limitations to make reasonable predictions of future flows and from the imprecision in determining the discount rate to calculate its present value. The value created for the shareholder must be based, as does the investment analysis, on the increase in cash flowexpected by shareholders, which is more tangible than profit. The investor invests money and what interests him is the money that he will receive in return. There are two main elements that feed the value created from the point of view of the shareholder of a company: the increase experienced by the value of the shares, the dividends received and other possible monetary remuneration; for example, capital repayments. From the sum of these concepts, it is necessary to deduce the profitability that the shareholders would have obtained if they had invested in alternatives with a similar risk, that is, the opportunity cost of maintaining their investment in the company.The most appropriate indicator to measure the success of the company. company relates to its ability to create shareholder value. Financial practice offers a series of parameters that aim to assess the quality of management and that, with more or less intensity, are related to the creation of value for the shareholder: economic return (ROI), financial return (ROE), economic value added (EVA), cash value added (CVA), market value added (MVA), cash flow return on investment (CFROI), total shareholder return (TSR), etc. All of these indicators present a series of deficiencies to measure the creation of value for the shareholder by measuring past actions and omitting the value created by changes in expectations. In fact, these indicators should be used with caution, since they favor reaping results in the short term, deteriorating the potential to create value and, therefore, undermining the longer-term results.Great care must be taken in its use as a guide to the company's strategy. The selection of criteria to evaluate the management and the situation of the company should not forget that the important thing is to manage the creation of value rather than trying to implement systems to measure it, because, as in any sports competition, the scoreboard establishes the winner, but does not guide how to win. Below we present a summary table with the “key themes” related to value creation.the marker establishes the winner, but does not guide how to win. Below we present a summary table with the “key themes” related to value creation.the marker establishes the winner, but does not guide how to win. Below we present a summary table with the “key themes” related to value creation.
