Category Archives: Finance

How do we measure shareholders’ wealth?

In order to answer the question; ‘how do we measure shareholders’ wealth?’ We have to first of all understand the sources of shareholders’ wealth.

 
There are two primary sources of shareholders wealth namely:
1. Dividends received from investment
2. Market value of share or through capital appreciation

 
In financial management terms, we call this the Total Shareholder Return (TSR). TSR = dividend yield + capital gains through share price appreciation.

 
How to measure shareholders wealthFor us to measure shareholders wealth, we must first of all have an idea of what the value of a company is and what its shares are worth. This process sound very easy in theory but is very difficult or impossible in practice to correctly ascertain the value of a company and its shares.

 
At best, we can employ some valuation techniques which we shall briefly look at to value a business and its share.

 
How to value a company
We will discuss 3 most popular business valuation techniques in this section of this article that attempts to provide an answer to the question ‘how do we measure shareholders’ wealth?’

 
1. Valuation through analysing statement of financial position (AKA Balance Sheet)
Here, analysts value a company based on the worth of a company’s assets on a going concern basis. A company’s statement of financial position value increases as company retains its earnings. If this increase is maintained year on year it then means that the company is profitable and has therefore created value for its owners.

 
Statement of financial position value is not a proxy for a company’s market value but it gives an indication of the level of dividends that a company could potentially pay in the future.

 
2. Valuation on Break-up basis
Business valuation that is based on breakup basis assumes that the value of a business is the sum total of the monetary value of its individual assets. This basis will only be used when a business in the process of liquidating or being wound up. This method can also be used when management decides to sell up the assets of a company to raise cash.

 
3. Valuation through Market value analysis
The market price is theoretically the fair value for the share price of a company. This is what buyers and sellers are willing to exchange value on behalf of the company in an arms-length basis.

 

There are number of factors that could influence the market value of a company’s’ share. These include but not limited to: Major announcement, Change in management, better than expected profit forecast, Potential bid takeover, R&D breakthrough, etc.

 
Valuation of a company from the perspective of market value is the most relevant one as far as shareholders are concerned as this is consistent with meeting their financial objective which is to maximise shareholders’ wealth.

 
After ascertaining the value of the shares of the company, we will then add any increment (purchase price less current market price) experienced by the investor to the dividend yields.

 
Conclusion
Shareholders wealth comes from two primary sources- dividend received and the market value of shares held at a particular point in time and through those sources, we can measure the wealth or value of shareholders.

 
I hope that this short post provides an answer to your question of ‘how do we measure shareholders’ wealth?
Feel free to ask any further question in the comment section below.

THE IMPORTANCE OF FINANCIAL MANAGEMENT | WHY YOU SHOULD MANAGE YOUR FINANCE

The importance of financial management is so huge that its impact in an economy is instantly felt whenever changes is made to prevailing financial management process of a system.
Financial management is the process of actively seeking the best way of handling our dealings that involve finances. This article on the importance of financial management is written to explain in plain language, the benefits and gains of having a functional and reliable ways of handling your financial matters.

The functions of finance is now pervasive as you will find in this article. The rest of this post will now be used to discuss the importance of financial management in our modern world.

 
Uses of financial management in our modern society

 

1. Economic Growth and Development
Quality financial management is the main force behind economic growth and development. Resources are easily multiplied when properly managed and financial management is all about taking care of scarce resources while at the same time seeking ways to increase the value of the resources

 

2. Improved Standard Of Living
The standard of living of an individual is measured by his or her income, ease of access to good things, and the general lifestyle of the individual. Standard of living can generally be improved by a person’s ability to attract and retain wealth. Without proper management of finance through financial management, wealth may not be attracted talk more of being retained.

 

3. Reduction of the Potential Financial and Economic Global Crisis
That we have been able to come out of various global financial crisis that mankind has known is largely due to the application of proper financial management techniques. Financial engineers rally round to seek solution to any financial crisis.

 

Although many argue that the financial crisis are caused by financial engineers in the first place but what really matters is that financial management as a discipline has been able to help alleviate various problems of global financial crisis.

 

4. Job Creation
The world is not in want of people with the title ‘financial manager or financial adviser’. These people would not be in employment if not for the fact that we have a thing called financial management. Financial management does not only create jobs directly but also indirectly.

 

A company whose finances are well managed will not only survive but expand thereby creating more jobs. Option and derivatives traders are just some of the career opportunities that the field of financial management has made possible.

 

5. Aid Planning
Companies engage in financial planning in order to help increase shareholders wealth. Financing gaps for example are identified through financial management technique known as gap analysis. Based on the outcome of this process, plans are then made to raise finances that will help offset the identified short fall.

 

6. Risk and Uncertainty Management
Financial management as an offspring of economics have been able to develop hybrid risk management tools and framework that has benefited all works of life. In the bid to create low risk financial environment, players in financial management arena have developed powerful tools to manage both financial and business risks.

 
7. Wealth Redistribution
Financial management that is supercharged with fintech have made it possible for us to now have many first generation millionaires and even billionaires, through astute application of sound financial management techniques, individuals that would have remained poor have escaped poverty.

 
Every economy that is the envy of all and sundry is built on solid financial management. Like a wise man will say; show me a prosperous and wealthy nation and I will show you bundles of financial planners with guts.

 

It is evident from the above points that the importance of financial management in our lives cannot be downgraded in any way. Remove proper and disciplined financial management and see the world go back to the Stone Age.