Period Profit, Shareholder Value, Share Capital, EVA®, CVA®, NVA and Cash Flow - Different Notions, Each Having its Own Peculiarities
24 Pages Posted: 12 May 2003 Last revised: 10 Jun 2016
Date Written: April 9, 2003
According to at least some people, the objective of a capitalist business is taken to be the maximisation of the wealth of its owners, of course within legal, ethical, political and maybe more boundaries. The wealth of its owners can be measured in terms of the period profits i.e. the maximum dividends paid and/or shareholder value i.e. the market value of the company's shares. Profit (the measured profit figure) and shareholder value: two different phenomena, each having its own merits. Also cash flow and profit are two different phenomena. No cash flow is able to make up for what is wrong concerning the profit figure. High(er) cash flows can go very well hand in hand with low(er) profits. Period profit is supposed to be a non-measurable event, referred to as the search for the philosopher's stone. Profit indeed has many dimensions, it is truly a complex quantity, but still it is a measurable event of the real world. Profit measurement should be soluble, because after all, it is a down to earth money counting problem.
What has been argued by so many people e.g. Pablo Fernandez: the adage 'profit is an opinion, cash is a fact', is not true. It is the other way round. Period profit can be measured exactly. About what 'cash flow' is, various writers advocate different opinions. Profit figures (like all figures) should not be blindly accepted, always demand to see test and proof.
NVA (period) i.e. Net Value Added is the proven net profit in any given period, less demand; in conjunction with the difference between tax and tax paid. The demand is that amount of profit, which is acceptable to managers and/or shareholders. Demands happen to be quite often not a scientific affair. They will depend on a lot of things, namely the risk of the investment, the level of output, the results from alternative investments, the state of the general economy, the level of interest rates, and so on and so forth. It all ends up in what must be regarded as the NORMAL demand, for the time being, in this firm.
Keywords: The new IASB rules do not meet reality, Value Differences, all along the line, positive and negative, nominal and substantial, From zero on, after deduction of value differences and taxes, net profit remains
JEL Classification: M41, M44, M47
Suggested Citation: Suggested Citation