The Importance Of Value Creation

Value creation is the direct consequence of an action or decision initiated by an entity. In essence, it is the measurable change in the “value” of the entity, be it a firm’s listed stock price, a company’s enterprise value of future earnings or its accounting value, due to the benefits and costs generated from a corporate action. With regards to businesses, firms generate benefits and costs in the form of monetary value, however this is disillusioned with regards to the perspective of the value bearer. In today’s information age, there are intangible factors that drive value creation, which can be overshadowed by the traditional methods of assessing an organisations performance. For example, assets may include future innovation, brand value, competent personnel, and intellectual property to name a few. Therefore, improving intangible assets can be an attribute of creating value in the long run. In order to …show more content…
It measures profitability after factoring in the amount of capital used in a business or a project at a period of time. As a true measurement of value creation, the ratio shows how much profit each pound of employed capital generates. This metric also measures value created for a firms’ shareholders as it illustrates the effectiveness of long-term financing strategy and how efficient the business can use its capital (Damodaran, 2007). A notable aspect of accounting based measures is that they are able to compare firms within an industry and evaluate how profitable the entity is relative to its size. However, Damodaran argues that this metric tends to favour mature companies as their assets have depreciated over a long period, thus manipulating the level of capital employed. Evans (2014) corroborates this point by using Tesco as an example where more capital is being occupied, but there is insufficient returns, which has led to a decrease in their