Abstract
This study highlights the importance of economic profits (EVA) and their long-term effects on shareholder value (MVA). South African companies listed on the JSE were analysed and it is evident that the relative measure of internal performance (spreads) can be used to rank companies in terms of value creation. Individual companies and sectors were also placed on a financial strategy matrix, which evaluated companies according to spreads and cash management. The sales growth less the SGR percentage, was used to indicate cash management. Statistical tests (regression analysis) were done on the data to test the validity of the financial strategy matrix model. The results showed that there is a positive relationship between spreads and shareholder value, but sales growth less the sustainable growth rate does not contribute significantly to shareholder value.
Highlights
Financial managers generally agree that two of the most important performance measures for a business enterprise are value creation and cash flows
It is argued that companies can achieve the greatest impact on shareholder value by maximising internal value creation, which is basically determined by the returns on their assets relative to their cost of capital
Stern (1993: 36) performed tests based on average values for Market Value Added (MVA), Economic Value Added (EVA) and other accounting performance measures and reported the following results of r2 relative to MVA: EVA 50 per cent; return on equity (ROE) 25 per cent; cash flow growth 22 per cent; earnings per share (EPS) growth 18 per cent; asset growth 18 per cent; dividend growth 16 per cent and turnover growth 9 per cent
Summary
Financial managers generally agree that two of the most important performance measures for a business enterprise are value creation and cash flows. The objective of this study was to place companies listed on the Johannesburg Securities Exchange South Africa (JSE) on a financial strategy matrix, based firstly on their ability to generate value as expressed by a measure called Economic Value Added (EVA), and secondly to manage sales growth (and its effect on cash/overdraft balances). Hawawini and Viallet (1999: 506) measure the cash management ability of a company by using a differential in percentages that is determined by subtracting the sustainable growth rate (SGR) from the actual growth rate in sales.
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