Creating Value: Internal and External Factors

Topics: Financial markets, Generally Accepted Accounting Principles, Economics Pages: 5 (1243 words) Published: March 22, 2015


Discussion Board 2:  Valuation
Charles E. Sullins, Jr.
Managerial Finance – BUSI 530_B10
Liberty University
 
 
 

INTRODUCTION
The purpose of this thread is to discuss the factors that lead to a valuation of a company’s worth compared to that of the financial statements, and how company executives create the most value for all stakeholders.  Value is formed by different internal and external factors.  This discussion will examine some of these factors in an effort to determine how a company’s worth is measured.  This discussion will also include views from a faith-based standpoint and how human success must glorify God.  “Love not the world, neither the thingsthat are in the world. If any man love the world, the love of the Father is not in him” (1 John 2:15, KJV).   INTERNAL FACTORS

There are several internal aspects of a business that can determine, or aid in the determination, of a company’s value from the age of the company to the stability and legal comfort of the company.  How a company conducts their accounting practices and reporting can affect its valuation.  Cash accounting versus Accrual accounting can provide a different snapshot of a company’s value.  Although Cash accounting can provide tax advantages for business owners, it is not usually a true example of a company’s value.  According to Grant (ND), “Accrual accounting, on the other hand, does more accurately measure the true activity of a business.  Revenue is recognized and is shown on the profit and loss statement after the work is completed (a service is performed or a product is delivered).  Not when the money comes in.  Similarly cost is recognized when you buy something, not when you pay the bill” (para. 3).  Further, fair value accounting, or GAAP, is accepted as a solid internal method for gauging value.  Ramanna (2014) states, “One explanation for the rise of fair value accounting is that finance theory—in particular, the idea that financial markets are efficient and their prevailing prices are reliable measures of value—permeated academic accounting research in the 1980s and 1990s, thus changing opinions on the relative merits of historical cost and fair value” (para. 4).  Financial statements show profits and losses, revenues and earnings, losses, cash flow, and debt – just to name a few things, thus affecting stock prices.  Although there are opportunities for companies to be crafty in their accounting reports, it is best to rely on those companies with strong ethical practices – not only for personal gain, but also for spiritual gain.  “ Lying lips are abomination to the LORD: but they that deal truly are his delight” (Proverbs 12:22). EXTERNAL FACTORS

External factors are just that: from the outside of the company.  Many external factors can affect stock prices and overall company value from demographics to the state of the economy.  According to Sjoqvist and Stephanovych (2008), “It is necessary to look at factors outside the company that are not within the company’s control and may have a large affect on its future development.  For valuation purpose, the analysis of industry and macroeconomic environment may be crucial” (p. 13).   One must consider how things outside the company affects its value.                 Many of the external factors that play a role in determining a company’s value are: •         Politics

•         Competition
•         Globalization
•         Inflation and recession
•         Interest and exchange rates
•         Technology
•         Culture and values
•         The environment
ECONOMIC STATEMENTS VERSUS COMPANY VALUE
There are two wells from which to draw in determining the value of a company: company value and economic statement.    Economic statements show a company’s financial standing and their economic footing.  A company’s worth is provided by factors not specifically tied to the economic statements.  Gad (2013) compares market value...
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