factors that can impact a company’s stock price and perceived value of the company.. Company executives are tasked with creating the most value they can for all their shareholders. There are many factors that contribute to company’s worth. There are also many factors that can impact a company’s stock price and perceived value of the company. These factors can be internal and external that determine the valuation of a company and affect the financial statement.
Executives create the most value for all their stakeholders by addressing these areas:
- Focusing on the competitive environment that their business competes. They should make business decisions based not the individual stockholder’s but on the competitive climate.
- Make business decisions that create a greater expected value, even at the cost of lowering near-term earnings. Many businesses compare and evaluate decisions based on the estimated impact on earnings, when they should be measuring their earnings against the incremental value of future cash flow.
- Executives should carry assets that will only maximize the value of the company. These assets would be products that customers are willing to pay higher prices for such as brands, real estate, or other assets.
- Always return additional cash to shareholders when there are no profitable opportunities to invest in the company.
- Provide shareholder with information that is relevant and valuable. Better information helps reduce investor uncertainty and will, in the long run, reduce capital cost and grow share price (Rappaport, 2006).
Beside executives affecting the company’s value, sometimes external factors affect a company’s valuation. These external factors will affect a businesses’ value:
- Taxation: All companies try to keep their tax payments to a minimum
- Company Assets: Real estate, equipment, patents, trademarks and agreements.
- Government policy: Political trends. Which political party is in in control? Democrats or Republicans.
- Capital markets: Value of money, Rate of Return, and money supply
- Macro-economic forces: economic outputs, unemployment rates, and inflation Wesley (Legg, 2015)
With these areas of concerns affecting the valuation of a company, the stock prices can also be affected by similar events. These issues affect stock prices, which in turn, could affect the valuation of a company.
- Internal actions of a company: Mergers, acquisitions, earning reports, innovations, and suspension of dividends.
- World events: wars, civil unrest, terrorism, and pandemic
- Inflation and interest rates: Federal Reserve monitoring inflation
- Financial reports and company hype: Introduction of a new product and endorsements by respected investors like Warren Buffet.
- Exchange Rates: Foreign currency has an impact on stocks (Wolski, 2019).
However, all these factors will be compared and analyzed using the company’s financial statement. The financial statement shares the company’s business activities and financial performance. The balance sheet provides the company’s assets, liabilities, and stockholder’s equity. This report provides a quick view of the company at a certain time (Murphy, 2015).
Like in any business transaction, the value of the business, product, service, is what an individual, company, or group is willing to pay for it.
Legg, W. (2015, February 24). How External Market Factors Drive Your Company’s Valuation. Retrieved from https://foundersib.com/2015/02/24/how-external-market-factors-drive-your-companys-valuation/
Murphy, C. B. (2020, October 27). How to Interpret Financial Statements. Retrieved from https://www.investopedia.com/terms/f/financial-statements.asp#:~:text=Key Takeaways-,Financial statements are written records that convey the
Rappaport, A. (2014, August 01). Ten Ways to Create Shareholder Value. Retrieved from https://hbr.org/2006/09/ten-ways-to-create-shareholder-value
Wolski, C. (2019, February 12). Five Factors or Events that Affect the Stock Market. Retrieved from https://smallbusiness.chron.com/five-factors-events-affect-stock-market-3384.html