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The value of owning a single share in the firm is called the Shareholder Value. Increases in shareholder value come not only from increases in share price, but also from dividends paid out (and then invested elsewhere).
MikesBikes-Advanced uses cumulative increase in shareholder value as "the score". This has advantages over other measures. Market share and cumulative net profit are inappropriate because they favor size without considering the return on the capital employed, nor the riskiness of the firm. Earnings per share likewise doesn't consider the risk of having high levels of debt.
Changes in shareholder value are often due mainly to changes in Share Price. Share Price is based on Earnings per Share smoothed over several years. Consideration is taken of investments (such as product development) which will reduce the current profit but may well produce returns in the future. The debt/equity ratio of the firm is also taken into account. The higher the level of debt, the lower the share price (all other things being equal).
The Shareholder Value represents the increase in wealth obtained by a shareholder in the firm. This is calculated by the simulation at the end of each period as in the following example.
|
Period |
2010 |
2011 |
2012 |
2013 |
|
Share Price |
$13.00 |
$14.00 |
$15.75 |
$16.00 |
|
Current Dividend |
$0.20 |
$5.00 |
$0.40 |
$0.35 |
|
Total Previous Dividends and Interest @ 10% |
$0.00 |
$0.20 |
$5.22 |
$6.14 |
|
Interest on Dividends (PV) |
$0.00 |
$0.02 |
$0.52 |
$0.61 |
|
Shareholder Value |
$13.20 |
$19.22 |
$21.89 |
$23.10 |
|
Value Created |
|
$6.02 |
$2.67 |
$1.31 |
|
Change in Year |
|
45.6% |
13.9% |
5.9% |
|
Cumulative Change |
|
45.6% |
65.8% |
75.7% |
The most important figure is the Cumulative Change. This represents the return which an investor with one share at the start of the simulation (when you took over management) would have received to date. It is made up of:
The Change in Year represents the percent increase (or decrease) in shareholder wealth that period.
The Cumulative Change represents the percent increase (or decrease) in shareholder wealth since the beginning of the simulation.
Another way of looking at increasing shareholder value is by considering the Economic Value Created, sometimes called EVA. Any economic value created represents return to shareholders in excess of what they would expect to return elsewhere. This will lead to an increased share price.