The Value Equation

Chapter 7Pulling the Corporate Efficiency Levers

The Six Variables that drive corporate shareholder returns can be grouped into three types of corporate financial efficiency. At a high level, these efficiencies represent the financial levers at the hands of management that will impact future corporate equity returns and shareholder value creation. The three types of corporate financial efficiency are:

1. Operating efficiency (O)
2. Asset efficiency (A)
3. Capital efficiency (C)

Although all three efficiencies are equally important, most businesspeople I know tend to focus on corporate efficiencies in pretty much this order. The V-Formula numerator contains the Six Variables that can pretty much be divided evenly into the three corporate efficiencies.

The formula denominator, being just the percentage of the business funded by equity, is not an added variable; it is just the inverse of the percentage of the business funded by OPM.

Here is the V-Formula numerator, with each variable labeled with the type of corporate efficiency it represents:

Operating Efficiency (O)

Sales

Corporate operating efficiency begins with sales. A banking adage that I learned at the beginning of my career is this: “No one ever went out of business because they had too many sales.” Sales are the life blood of a business, the first key to corporate operating efficiency, and are effectively simplified in the ...