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Company value and Manager mision - Coggle Diagram
Company value and Manager mision
Why value value?
Belief
Healthier companies lead to stronger economies
Focus on building shareholders’ value make healthier companies
Healthier companies lead to higher living standard
Ascendancy of shareholders’ value
Emergence of market for corporate control
Growing of equity based bonus for management level
Increase of equity holding as percentage of household assets
Social security systems are heading to insolvency
The value manager
Definittion
Willing to act on opportunities to create incremental value
take outsider’s view of the business
Develop managing value philosophy in the companies
Process
Restructuring to unleashes value trap
Divestitures
Layoffs
Developing value-oriented approach after restructuring
priorities based on value creation
Gearing, planning, performance measurement and compensation towards shareholders’ value
Communicate with investor in term of value creation
Fundamental principles
Real market: ROIC > opportunity cost of capital
The more invest in ROIC > Opportunity cost of capital the more value created
Select strategy to maximize PV of expected cash flow or economic profit
Stock market value = intrinsic value based on market’s expectation of future performance (may not be an unbiased estimate of performance)
Return that shareholders earn depend on expectation vs actual performance
Metrics mania
Best way to understand the performance of the stock from market perspective?
Total return of shareholders (TRS)
Market and sector movements explains 40% of share price of one company in any one-or-three year period
In short term, actual performance + market expectation + change in the expectation drive share > level of performance per se
Market expectation is the treadmill. Manager’s performance should beat the speed of the treadmill
In short term, good companies may not be good investment, and vice versa
Companies which high market expectation, TRS-based reward may be insufficient
Companies which less market expectation, TRS-based reward may be overcompensate
Newly announce new CEO make share price increase 10%
Market value added
MVA = diff between market value of companies' debt and equity and amount of capital invested
market-to-capital ratio = market value/ capital employed
MVA is just accounting measure. That's problem
There are factor outside management's control
Measure the future performance relative to capital invested in the business
MVA is current speed of the treadmills
Use TRS and MVA together
Market-to-capital ratio is high and TRS is high
Market’s expectation is high but the actual performance could beat the expectation
Market-to-capital ratio is low. TRS is low
Market’s expectation is low, but actual performance could not beat the expectation
Market-to-capital ratio is low. TRS is high
Market’s expectation is low. Actual performance beats the expectation (easily?)
Market-to-capital ratio is high. TRS is low
Market’s expectation is high. Actual performance could NOT beat the expectation
Logic of the DCF approach compared to the others (P/E)?
DCF
Take into account of capital required and its timing
Investment add value by generating return above the return that can be earned on other investment of similar risks
At given level of earning, higher return require less capital, hence generate higher cash flow, hence higher value
P/E
P/E does not indicate the investment required to generate eanring
P/E does not take into account the time value of money
When earning reflects cash flow, P/E can be the same as DCF
If DCF is the best way why we need ROIC and growth?
ROIC < Cost of capital: value destruction
ROIC = Cost of capital: Value neutral
ROIC>Cost of capital: Value creation
ROIC and growth provide better insight to economic of a business
ROIC and growth can be used as short term performance target
Short term cash flow is not good performance measure
Short coming of financial measure and why should use non-financial measure?
Short-term financial measure could be especially misleading
Ex: stellar performance is resulted from increase of price, which attracts new entrants and erode market share
leading indicator should be used also
market share
R&D pipeline
etc.