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Earnings per share
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Free cash flow
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Economic value added
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Market value added
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Total shareholder return
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Here’s what else to consider
When you are involved in a deal, whether as a buyer, seller, advisor, or investor, you want to know how much value it will create for the shareholders of the participating companies. However, measuring shareholder value is not a simple task, as different methods may yield different results. In this article, you will learn about some of the best ways to measure shareholder value in a deal, and how to use them effectively.
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1 Earnings per share
Earnings per share (EPS) is a common metric that shows how much profit a company generates for each share of its stock. EPS can be used to compare the performance of different companies, or to evaluate the impact of a deal on the shareholders of the acquirer and the target. A deal is said to be accretive if it increases the EPS of the acquirer, and dilutive if it decreases it. However, EPS is not a perfect measure of shareholder value, as it does not account for the cost of capital, the growth potential, or the risk profile of the deal.
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O EPS é uma métrica a ser utilizada quando avaliamos o retorno ao acionista, porém longe de poder ser utilizada sozinha. O lucro é de grande importância devido ao fato de trazer a visão do resultado completo e já considerar "o que sobra" após a depreciação (que posteriormente tem alta probabilidade de se tornar CAPEX de manutenção), juros de dívidas e pagamentos de impostos. No entanto, o lucro não traz informação de liquidez, capital de giro e demais informações de caixa que são importantes para a saúde financeira de curto prazo de uma empresa e podem gerar valor.Além disso, o EPS é uma métrica que pode aumentar sem que o lucro realmente aumente, motivado pela recompra de ações e posterior cancelamento de ações que a empresa pode fazer.
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2 Free cash flow
Free cash flow (FCF) is another metric that reflects how much cash a company generates after paying for its operating expenses and capital investments. FCF can be used to estimate the value of a company by discounting its future cash flows to the present, using a suitable discount rate. FCF can also be used to measure the value creation of a deal by comparing the FCF of the combined entity with the FCF of the standalone companies. A deal is said to be value-creating if it increases the FCF of the combined entity, and value-destroying if it decreases it. However, FCF can be affected by accounting choices, timing issues, and assumptions about growth and discount rates.
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3 Economic value added
Economic value added (EVA) is a metric that measures how much value a company adds to its invested capital, by subtracting its cost of capital from its operating profit. EVA can be used to assess the profitability and efficiency of a company, or to measure the value creation of a deal by comparing the EVA of the combined entity with the EVA of the standalone companies. A deal is said to be value-creating if it increases the EVA of the combined entity, and value-destroying if it decreases it. However, EVA can be sensitive to changes in capital structure, tax rates, and accounting methods.
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4 Market value added
Market value added (MVA) is a metric that measures the difference between the market value of a company and its book value of invested capital. MVA can be used to evaluate the performance of a company over time, or to measure the value creation of a deal by comparing the MVA of the combined entity with the MVA of the standalone companies. A deal is said to be value-creating if it increases the MVA of the combined entity, and value-destroying if it decreases it. However, MVA can be influenced by market expectations, sentiment, and volatility, which may not reflect the true value of the deal.
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- Robert Drummond Chair of commercial investment holding company. Board and commercial advisor. at Guy's and St. Thomas' NHS Foundation Trust
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Market value is not an easy thing to assess. It is often to do with market share, protected technology, ability to grow fast and lack of sizeable or better known and cash rich competitors in the same or similar markets. Who would have valued Amazon or Tesla as high as it was justified in their early days. I was an advisor in a court case which was to do with a company that invented 3.5 inch disk drives and built a plant in the USA to grow in the largest market. Their US competitors used the technology even though it was well patented and were strong enough to brush aside the court compensation which was less than the company's debt in liquidation.
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5 Total shareholder return
Total shareholder return (TSR) is a metric that measures the return that a shareholder receives from investing in a company, including dividends and capital appreciation. TSR can be used to compare the performance of different companies, or to measure the value creation of a deal by comparing the TSR of the acquirer and the target with the TSR of their peers or benchmarks. A deal is said to be value-creating if it increases the TSR of the acquirer and the target, and value-destroying if it decreases it. However, TSR can be affected by external factors, such as market conditions, industry trends, and competitor actions, which may not be related to the deal.
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6 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
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- Robert Drummond Chair of commercial investment holding company. Board and commercial advisor. at Guy's and St. Thomas' NHS Foundation Trust
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Understanding the Structure of a market and the effect of probable change is critical to valuing a business. In the late 1990s I was a director of a listed local newspaper publisher called Southnews plc which we sold to Trinity Mirror for over £300m. The company had grown fast and had been highly profitable with major distributions to its shareholders. The purchase destroyed Trinity Mirror even though they were in the same business but had completely failed to realise that printed weekly local newspapers were soon to be drastically affected by the internet.
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