how asset use drives value
companies raise capital to buy assets and use those assets to generate sales or invest in new projects while expecting a positive return a well managed company maximizes the use of its assets so that the firm can operate with a smaller investment in assets assume for example that a plumbing company uses a truck and equipment to complete residential work and the total cost of these assets is 50 000 the more sales the plumbing firm can generate using the truck and the equipment the more shareholder value the business creates valuable companies are those that can increase earnings with the same dollar amount of assets instances when cash flow raises valuegenerating sufficient cash inflows to operate the business is also an important indicator of shareholder value because the company can operate and increase sales without the need to borrow money or issue more stock firms can increase cash flow by quickly converting inventory and accounts receivable into cash collections the rate of cash collection is measured by turnover ratios companies attempt to increase sales without the need to carry more inventory or increase the average dollar amount of receivables a high rate of both inventory turnover and accounts receivable turnover increases shareholder value factoring in earnings per shareif management makes decisions that increase net income each year the company can either pay a larger cash dividend or retain earnings for use in the business a company s earnings per share eps is defined as earnings available to common shareholders divided by common stock shares outstanding the ratio is a key indicator of a firm s shareholder value when a company can increase earnings the ratio increases and investors view the company as more valuable 