shareholder value analysis
firm's value based on return to stockholders a calculation of the value of a company made by looking at the returns it gives to its stockholders. Shareholder value analysis, like the economic theory of the firm and economic value added, assumes that the objective of a company director is to maximize the wealth of the company's shareholders. It is based on the premise that discounted cash flow principles can be applied to the business as a whole. Shareholder value analysis can be applied to assess the contribution of a business unit or to evaluate individual projects. It is a concept also used for managing long-term financial decisions so that the value of the business is increased. It takes the view that standard accounting methods for calculating the value of a business are outmoded: they either dwell on a backward-looking historical perspective, or are simply too short-term. Business decisions that are based on techniques such as price/earnings ratios or growth in profits are inadequate, because it is possible to make decisions which improve these measures in the short-term (such as reducing training or research expenditure), but which reduce the long-term value of the business. Therefore the basic belief underlying shareholder value is that a business adds value for its shareholders only when equity returns exceed equity costs. The concept of shareholder value works from the premise that a business adds value for its stockholders only when equity returns exceed equity costs. SVA is therefore focused on long-term profit flows. Applying shareholder value analysis requires a long-term perspective, possibly involving significant change in what the organization does and how it does it.