Enterprise Value and How to Create It

Currently, one of the most frequently asked questions in the business world is how much value a company generates and what is the way in which its value can be enhanced. It is why the Division of Business Administration and Accounting, together with the Public Accounting and Financial Strategy program of ITAM, carried out its Webinar “Enterprise Value and How to Create It,” with the participation of Martin Schwarz, Executive VP of Stern Value Management, and Cynthia Guajardo, manager of Stern Value Management and former student of ITAM’s accounting and financial strategy undergraduate program.

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The Webinar was divided into five blocks:

  1. Definition of Value
  2. Value-Based Management
  3. Generation of Value in Business
  4. Value Creation in an Organization
  5. Alignment of Expectations to Create Value

 

Definition of Value

According to Martin Schwarz, the value of a company is that which is generated when the market value is higher than the capital that has been invested. On the other hand, he said that many companies do not measure their value adequately, since they focus on margins and volumes that do not take into account the costs and invested capital. Economic Value Added (EVA) is the only measure that permits measuring the value creation in a correct way since it is in charge of measuring the creation of value at an operational level taking into account the capital and invested capital.

Executive Vice president of Stern Value Management
Martin Schwarz, Executive Vice President of Stern Value Management

Value-Based Management and Value Creation in Business

Cynthia Guajardo stated that, in order to generate value in a sustainable way for shareholders, it is necessary to follow an administration system that has the EVA as its center and not another type of metric. This will allow companies to obtain benefits such as improved liquidity management, effective use of capital, productivity increases, etc.

She emphasized that to determine the generated value of each company, as mentioned before, it is necessary to calculate through the EVA, since it is the complete measure of value generation of a business, since it takes into account all operating costs including the opportunity cost of capital.

Cynthia Guajardo, Manager of Stern Value Management

Creation of Value in an Organization

The speakers mentioned that the EVA is linked to the decision making of investors, however, if we do not take it into account and the decisions are only based on metrics, such as Return on Invested Capital (ROIC), we can destroy all the value generated. In order to create value in an efficient way, it is necessary to consider four aspects:

    1. Operating efficiently: increase return on current capital
    2. Grow profitability: invest capital in activities in which ROIC > WACC
    3. Divest: Reduce capital in activities that destroy value
  • Optimize the Cost of Capital

 

Alignment of Expectations to Create Value

During the last block, emphasis was placed on the mistakes that traditional methods have led to for years – one of the main ones is to base goals on the budget, and this leads to the search for more “realistic” goals, which may fall short compared to the general objectives of the company.

That is why Martin Schwarz explained that in order to generate value it is necessary to set goals from the top down. In this way, lower goals will not be sought; instead, emphasis will be placed on initiatives to achieve the strategic objective of the organization.

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