Building Shareholder Value Through Improved Capital Management

In their quest to increase shareholder value owners and managers will often look to growth, specifically growth in net income. Although growth is often desirable, it doesn't necessarily indicate whether a company is fundamentally healthy, in the sense of being able to sustain its current performance and to build profitable businesses in the future. Value-minded executives know that although growth is good, returns on invested capital can be an equally - or still more - important indicator of value creation.

Increases in a company's cash flow and, ultimately, its market value stems from a combination of its long-term growth in revenues and profits and from its returns on invested capital (ROIC) relative to its cost of capital.