Here are some reasons why Shareholder Value is the main metric in MikesBikes:
There are arguments for and against any metric you might choose. However, if there is a single metric on which students are measured, Shareholder Value is better for grading in most courses. This metric is simple to understand, capture and reward both financial and operational performance, and provide reasonable consistency of grading across courses.
What about alternative metrics?
Share Price
The Share Price valuation model incorporates a number of factors such as:
- Earnings per Share (smoothed over time to reduce the effect of one-off good/bad performances)
- Adjustments for certain types of spending which potentially add future value to your company, such as investment in product development, etc.
- This is important so that firms who only make small profit or loss due to heavy investment in R&D or building product awareness are not punished.
- Risk – In general, the higher the Debt/Equity ratio of the company, the higher the risk and the lower the Share Price.
- Since it is based on Earnings per Share, in general, if you issue many shares, your Share Price will suffer. On the other hand, if you repurchase shares, your Share Price will improve.
Share Price hits most of our goals for a grading metric. However, Shareholder Value is a logical choice over Share Price because Shareholder Value is the current Share Price plus the present value of all past dividends paid. It is the value to an investor over time of having owned a single share of the company since the beginning of the simulation.
Market Share
Market Share by itself isn’t a particularly useful metric – your competitors could have a lower market share and be significantly more profitable.
Growth in profitability does not take into account how you financed your growth. Did you have to issue a large number of shares to fund your growth, which dilutes the value to an investor? Did the company heavily leverage itself increasing risk? What is Profitability? Do you look at total periods made in a given time period? Do you weigh more recent profits more heavily? What about the time value of those profits? How would you provide an understandable metric for that?
Total Market Capitalization
If you use total market capitalization, then you are inviting students to issue large amounts of additional equity to grow that figure. This is unlikely to benefit the performance of a successful company in any significant way as they do not require the extra funding.
Therefore, it is difficult to choose another single metric that captures the financial and operational performance of the company as well as Shareholder Value does.
On a side note, you could construct a Balanced Scorecard type metric where you look at various factors from different parts of the organization. In general, you still need to combine those somehow into a score which can be ranked and graded (and Shareholder Value would probably still form part of such a system). You will end up with a similar effect to ranking by Shareholder Value, but your metric no longer corresponds directly to a business concept, and you have to decide how your score should work. Is it an arbitrary number of ‘points’? Is it a percentage? An arbitrary metric may be harder to understand and explain than Shareholder Value. However, this is probably how we would look at grading. If at some time in the future we ever decide that Shareholder Value does not sufficiently capture performance across the entire business.