The Valuation Handbook: Valuation Techniques from Today's Top Practitioners

CHAPTER 6

The Essence of Value-Based Finance

 

Roy E. Johnson

Co-Founder, Vanguard Partners; Currently D/B/A Corporate Strategy

 

 

The material in this chapter incorporates a process and set of analytic techniques that delve into the true economic characteristics and performance of companies, as well as business units within companies. There are two major building blocks of value-based finance (VBF) that will be explored:

1. Indicators of shareholder value creation, neutrality, or destruction.

2. Measurements of actual or potential value created, maintained, or destroyed.

The chapter is divided into the following segments:

• Introducing Value-Based Finance (a Transition from Accounting to Economics). An example is given to display the potential differences between accounting and economic returns, along with implications.

• Valuation Perspectives: Economic Profit (EP) and Market Value Added (MVA). EP is the primary indicator of value creation and at the core of many value-based performance systems implemented by leading-edge companies. MVA is a key measure of shareholder value creation, representing a spread between what financial markets (or investors) judge a business to be worth and what has been invested. This section explains and explores both.

• Valuation Perspectives: The Magnifier. This segment illustrates the value-creating impact of growth, which works in positive and negative directions.

• Valuation Perspectives: Financial Drivers and Value Profit Margin (VPM). This segment ...