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Share
holder value and economy
How much does shareholder value relate to the economy? This is a
highly debatable question. The purpose of this article is to highlight
the key factors in the economy which may influence the shareholders
wealth in general.
What is an economy?
An
economy is where businesses, individuals and government entities
interact together and provide services and value to each other.
Economies will in turn deal with other economies and this is today
known as international trade
What are the key measures of an economy’s performance? An
economy’s performance would be indicated by factors such as:
Inflation
Interest rates
Unemployment
Growth
These factors will affect shareholder value.
Inflation
This is a frequently spoken word in our country. It can be simply
defined as the fall in the purchasing power of money. All of us
know that today we can’t buy the same goods which we bought
in 1996 with Rs100.
This is because of inflation. Companies post their earnings in money
value. In a high inflation environment a company will have to post
above inflation earnings growth and ensure its share prices are
raising at an above inflation rate if shareholder value is to be
maintained. The Central Bank in Sri Lanka publishes annual inflation
rates. It is possible to work out and see how many companies have
achieved real growth.
Interest
Rates
This is a critical component of the economy. Lower rates will allow
easy raising of capital, therefore higher investments resulting
in more profits.
Lower interest rates will also stimulate consumer spending in terms
of credit cards, leasing, mortgages, personal loans, bank overdrafts
etc. Higher spending will lead to higher corporate profits. The
opposite would occur when interest rates go up and could lower the
earning potential of companies.
Unemployment
As unemployment increases there would be a drop in purchasing power
in the economy.
This would result in lower level of spending which would eventually
eat into the earnings of companies. The unemployed will take less
mobile phone calls, will eat out less and most probably will not
take mortgages or buy cars.
Growth
Growth is where the economy is increasing its output. Technically
this should result in better incomes for all in the economy. Corporates
should post better earnings and there should be higher personal
income for individuals. This again would result in higher spend
which would further boost corporate earnings.
Message
to the Investor
Compared to many countries in the world Sri Lanka’s economy
is quite volatile due to external shocks and internal management
issues. This will definitely influence shareholder value. Despite
good strategies and a business model the wealth may not be as high
as it should be.
The
only way Sri Lankan listed companies can overcome this problem is
by taking their products to other markets which have different economic
dynamics and thereby creating stable and sustainable shareholder
value. Many companies such as JKH, Hayleys and Aitken Spence have
already undertaken such initiatives with a high level of success.
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