• Models for measuring and predicting shareholder value: A study of third party software service providers

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      https://www.ias.ac.in/article/fulltext/sadh/030/02-03/0475-0498

    • Keywords

       

      Shareholder value; strategic profit model (SPM); economicvalue-added (EVA)

    • Abstract

       

      In this study, we use the strategic profit model (SPM) and the economic value-added (EVA to measure shareholder value). SPM measures the return on net worth (RONW) which is defined as the return on assets (ROA) multiplied by the financial leverage. EVA is defined as the firm's net operating profit after taxes (NOPAT) minus the capital charge. Both, RONW and EVA provide an indication of how much shareholder value a firm creates for its shareholders, year on year.

      With the increasing focus on creation of shareholder value and core competencies, many companies are outsourcing their information technology (IT) related activities to third party software companies. Indian software companies have become leaders in providing these services. Companies from several other countries are also competing for the top slot. We use the SPM and EVA models to analyse the four listed players of the software industry using the publicly available published data. We compare the financial data obtained from the models, and use peer average data to provide customized recommendations for each company to improve their shareholder value. Assuming that the companies follow these rules, we also predict future RONW and EVA for the companies for the financial year 2005. Finally, we make several recommendations to software providers for effectively competing in the global arena.

    • Author Affiliations

       

      N Viswanadham1 Poornima Luthra2

      1. The Logistics Institute - Asia Pacific and School of Computing, National University of Singapore, 10 Kent Ridge Crescent, Singapore - 119260
      2. Department of Information Systems,School of Computing, National University of Singapore, 10 Kent Ridge Crescent, Singapore - 119260
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