VALUE CREATION

VALUE CREATION & KEY DRIVERS OF VALUE

Value, Investment, and Growth

Value: The most an investor should pay for a company. Remember: Value is calculated
Long-term shareholder value is created by increasing the as the present value of a
present value of future cash flows. company's future cash flows.
Cost of capital: The return that investors expect in exchange
for their capital. The riskier the business, the
higher the cost of capital,
Return on invested capital (ROIC): The return that a
generally speaking.
company gets on its invested capital.
Growth rate: The rate at which a company grows revenue. Calculating Investment Rate
Companies split cash flows into two categories: growth rate
Investment =
1. Capital expenditures: Money used to fund growth rate ROIC
through activities.
2. Free cash flow: Cash available to return to investors Keep in mind: It's not always
in the form of debt payments, dividends, and stock possible to maintain both high
buybacks. growth and a high ROIC. Adjust
Investment rate: The percentage of the cash flow that is your strategy accordingly!
reinvested into a business.
There are many ways a company can drive growth, including: A well connected owner may
have access to resources like
• Network effects: When additional users add value to a suppliers, customers, capital,
product or business. and talent.
• Value innovation: The simultaneous pursuit of radically
superior value for buyers and lower costs for companies. Creating Shared Value
• Bolt-on acquisition: The acquisition of a small company • Try reimagining what you offer
that can be easily integrated into the parent. and to whom. Then, prioritize
Owners can add value to a company in several ways: improving more people's lives
to create customer value.
• Connections with other businesses
• Examine each step in your
• Good management or governance
value chain, then ask: how
• Access to key resources might I create more value
Shared value: Value for both shareholders and stakeholders. for other stakeholders in this
step?
Value capture: How a company converts customer value into
shareholder value.
Negative externalities: Costs created, but not paid for, by
the company.
Local cluster: A specialized, local business ecosystem that
requires cooperation among many partners.

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VALUE CREATION

Value and the Stock Market

Total return to shareholders (TRS) is calculated using the Calculating Market Cap
stock price appreciation and dividends, and is expressed as
Market = price per share x
an annualized rate of return. cap number of shares
Market cap: A company's market value.
Expectations treadmill: When analysts set increasingly With a share repurchase, the
aggressive targets for a company, which the company must number of shares available is
keep up with to maintain its stock price. reduced, which immediately
increases stock prices!
Short-termism: A dangerous tendency to focus too much on
short-term results at the expense of long-term value creation.
Share repurchases: A company uses its cash to buy back its
own shares.

©2022 QUANTIC SCHOOL OF BUSINESS AND TECHNOLOGY