Value

“Why Value Value?”

Every investor seeks value, that is, a return on invested capital that includes a reward for taking risk in addition to a payout for the time value of money. Company executives succeed by knowing how to create value for investors, which requires knowing how to measure it. But in good times, business leaders too often throw out the tried-and-true basics in favor of fads, like financial engineering, that eventually can decimate corporate value.

Managers need to follow four enduring corporate finance principles that can deliver strong employment and robust total returns to shareholders across all industries. The “four cornerstones of finance” derive from classic economic rules. They share a foundational idea: “companies exist to meet customer needs in a way that translates into reliable returns to investors.” The four cornerstones are:

1. “The Core of Value”

A company’s value springs from its use of investors’ capital to produce future cash flows at rates of return above what investors require to provide that capital. Thus revenue growth and return on invested capital (ROIC) are the dual engines for ...