2. MARKET
INDICATORS
Total Shareholder Return:
It is a summary measure for estimating the annual wealth creation performance.
It is a concept that shows the relative wealth creation of firms within a homogenous
group.
This is simply the rate of return earned by a shareholder through a combination of price
changes and dividends received.
Total Shareholders Return = Price Change Component
+ Dividend Component
•TSR is generally compared with the market benchmark like S&P 500 or other leading
companies.
•If relative performance is positive, one may conclude that the capital market has
responded favourably to managerial decisions and the management has created the
shareholders value.
•The measure is entirely based on the market’s perception about the firms future
performance.
3. WAI
The Wealth added index is a metric that tries to measure wealth created for shareholders
for a company. Designed by stern stewart and company consulting firm, it takes into
account a lot more factors instead of usual profit or share growth. The WAI holds that
wealth is only present if the return are more than the cost of equity.
The WAI measures the increase in shareholders wealth through dividends received and
share capital gain over a period of time, say 5 years, after deducting the cost of equity.it
thus addresses one of the key criticism of TSR by checking whether an impressive
opportunity cost given the length of time over which the TSR is measured.
•Observe the rise in market capitalization i.e. value of all the shares over say five years.
•Deduct the rise due to right issue.
•Add back the dividend paid over the period, buy back of shares.
•Deduct the required rate of return.
WAI = increase in market value of share – cost of equity
It the value is positive the firm is generating the value otherwise not.
4. MVA
In layman term MVA is the performance or addition in the capital employed in the
company. If this is positive it is said that the company is able to create value to its
investors otherwise not.
MVA = Market value of Debt + Market Value of Equity - Total Adjusted Capital
The incremental value that has been added over time is MVA.
•MVA increases only if the firm is able to earn above the cost of capital on invested
capital.
•MVA is also used as a way of benchmarking market performance between companies.
In order to have a comparable MVA, a standardized MVA is calculated by dividing the
change in MVA by the adjusted equity value at the beginning of the year.
Standardized MVA = change in MVA for the year / adjusted Equity at beginning of
the year
Example: XYZ company has 100000 shares of stock outstanding with a market price of
Rs. 225 per share. XYZ has reviewed the books values of equity and adjusted back to a
cash equivalent value of Rs. 2145000. Last year XYZ had a MVA of Rs. 75000. Calculate
MVA and Standardized MVA.
5. TOBIN Q
A ratio devised by James Tobin of Yale University, who hypothesized that the combined
market value of all the companies on the stock market should be equal to their
replacement costs. The Q ratio is calculated as the market value of a company divided by
the replacement value of the firm’s assets.
Q Ratio = Total Market Value of Firm / Total Asset Value
Decision:
Q = 0-1 = the cost of replacement of a firms assets is greater than its market value of its
stock. This implies that the stock is undervalued.
Q = >1 = the cost of stock is higher than the replacement cost of assets. Hence signifies
that the stock is overvalued.
This measure of stock valuation is the driving factor behind investment decision in Tobin
Q model.
6. M/B RATIO
An alternative measure of shareholders value creation is the market-to-book
value (M/B) approach.
Market Value of Equity = Market Value of the Firm - Market Value of
Debt
Market Value per Share = Market Value of the Equity / No. of Share
Outstanding
Book value per share = Invested Equity Share Capital / No. of Share
Outstanding
M/B Ratio = Market Value Per Share / Book Value Per Share
Value creation: if M/B > 1
Value maintenance: if M/B = 1
Value destruction: if M/B < 1
7. ECONOMIC PROFIT
Economic profit for a period is the amount earned by a business after
deducting all operating expenses and a charge for the opportunity cost
of the capital employed.
