Syndicate
Conditions for Value Creation
From the previous equation we deduce that the ratio (q) of value creation depends on the ROE of the company, of its growth of benefits and profit (K) the shareholders ask for.
So that the company creates value, in other words (q > 1) it is indispensable that the ROE of a company be greater than the profit K demanded by the shareholders. If the market value is the same it will coincide with the countable value (q = 1) and if the ROE if under K, the value of the market will be less than the value in the sites (1< 1).
Once we have gotten the ROE to be greater than the profit that has been lost by the shareholders (K), the more growth we obtain the greater the value creation will be (more q) and therefore, greater market value of the company. And the other way around, if ROE < K, the more least growth there is (q) and, therefore, we will have destruction of value, since (q) is less than one. If there is no growth, the ratio of value creation (q) will be the same to q = ROE/K.
The previous formula has the restriction that the ROE and K always have to be greater than the growth (ROE > g and K > g). Maximum growth will come about when dividends are not distributed and in that case the growth (g) will be the same as ROE, always supposing the company does not increase their debts.