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As a company business owner, likely with a range of shareholders, you should have a good understanding of shareholder value. For many companies, having high shareholder value is a primary business strategy and goes hand in hand with business management strategies. Knowing how to influence shareholder value is crucial if you want to scale your business. This article will explain what shareholder value is and some points to keep in mind if you want to grow your business.
What is Shareholder Value?
Shareholder value is the value that a company can give to its shareholders as a result of its ability to increase capital gains and dividends through:
- boosting sales;
- earnings; and
- cash flow.
Capital gains are the profit made when a shareholder buys a share in your company for the market price and then can make profits from selling those shares later.
Having substantial shareholder value is vital for securing confidence from investors in the long term and boosting your company’s market value and overall share price. Shareholder value is often linked to value of your business as a whole.
Further, increasing shareholder value will also mean that the shareholder equity section of your company’s balance sheet will increase.
What is Shareholder Equity?
Shareholder equity is reflected in the shareholder equity section of your balance sheet. It is your company’s net worth if it saw liquidation and the amount of money raised was divided between shareholders. This calculation involves looking at the sum of your company’s net asset value minus its total liabilities.
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How to Drive Shareholder Value?
Showing strong shareholder value can be a strategic priority for your company, especially if you want to secure investors’ confidence. One way of boosting shareholder value is to maximise the value you get from your assets. Having a lean and efficient business model is fundamentally the best way to boost shareholder value.
Similarly, having healthy cash flows is also a good indicator of the value you can add to shareholders. As such, prioritising good cash flow is one way of boosting your shareholder value. But, again, this can help you increase dividend payments.
Increasing net income per year will mean greater earnings per share. A company’s earnings per share are also a good indicator of shareholder value. This is calculated as the earnings available to common shareholders divided by outstanding shares of common stock.
Common stockholders are shareholders who hold common stock. Essentially, this means that they have less priority than preferred shareholders when you make payments to shareholders.
Book Value Per Shareholder
Another term you may come across is ‘book value per shareholder’ (BVPS).
BVPS shows a company’s net asset value on a per-share basis. To calculate book value per shareholder, you need to find the total value of shareholders’ equity minus preferred equity and divide this sum by the weighted average of the outstanding shares.
This is also a way of calculating shareholder value. Some value investors will look at BVPS in contrast with your company’s market price as a significant indicator when calculating whether a company is undervalued.
Should I Focus on Shareholder Value?
As mentioned, shareholder value is a strategic priority for many companies. This has been the case since the rise of the shareholder value model business strategy alongside the theory of value-based management.
As an early-stage startup company looking to expand and scale your business, it is often better to focus on the product or service you are giving customers first. Before you start getting into complex share formula calculation, it is often better to ensure that your service is quality and that you have a clear way of monetising your business. This can be equally important for early-stage investors.
Key Takeaways
As a business owner, you should be aware of theories around shareholder value models of running a business. This refers to when a company strategically prioritises the value it can add to shareholders through dividend payments or capital gains. Having high shareholder value will make your business desirable for investors, which will help you scale and grow. However, it is crucial to prioritise your strategic goals at the correct time. As an early-stage business, it is often better to look at growing your product or service and its customer base before getting into share value calculations.
If you need help with understanding how your company will be valued, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Shareholder value refers to the ability of your business to add value for your shareholders, usually measured through dividend payments or potential profits from capital gains.
A balance sheet is a statement of your business assets, liabilities, and other critical financial data.
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