Improving Company Profitability and Shareholder Value

What is Recommended for the Company's Shareholders?

A negative yield indicates that the financial returns from our assets are less than the cost of capital. Therefore, considering the company's viability, it is crucial to increase profitability, especially via the sales margin, which has deteriorated remarkably in recent exercises. Another solution, facing third parties like financial institutions, could be to increase the level of equity, thus reducing the company's indebtedness. By having less debt (and having profitability below the cost of capital), the financial profitability would automatically improve. However, this would be a fictitious improvement. It would improve the financial profitability of the company, but not that of the shareholders. The profitability of funds invested by shareholders in the company would probably be less than alternative investments they could find in the market.

Advantages of Implementing EVA

EVA (Economic Value Added) is an indicator that allows management to assign a cost to equity. Since the profitability expected by shareholders is an implicit cost, it is not shown in the income statement. Through EVA, this cost emerges, allowing us to see if the profit offsets the profitability expected by shareholders. We do not have enough information to determine the implicit cost accurately. We need additional information, such as the opportunity cost for shareholders, the risk-free interest rate, the risk rate for this business, etc.

Advantages of Implementing the Balanced Scorecard

The Balanced Scorecard provides a series of management indicators that allow for assessing the company's progress, not only in the short term but also in the medium term, to the extent that these indicators are based on certain strategic objectives. Obviously, it is always advisable to have a Balanced Scorecard as a means of monitoring and supporting decision-making. In this case, its implementation should be considered in terms of available information systems (whether the business has the necessary data and information) and the costs that its implementation would entail. The cost should not be greater than the advantages that may arise from its use. Therefore, initially, we cannot recommend the use of the Balanced Scorecard with complete certainty without knowing the benefits and costs associated with its implementation.