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WMT Mature Firm's: Value Created
WMT Mature Firm's: Value Created
retained by the company: $38.87 - $10 = $28.87. That is, over the five-year
period, the company retained a total of $28.87 earnings per share. Over the
same duration, its stock price rose by ($154.12 - $95.30 = $58.82) per share.
Dividing this price rise per share by net earnings retained per share gives a factor
of ($58.82 / $28.87 = 2.037), which indicates that for each dollar of retained
earnings, the company managed to create $2.037 worth of market value.
If the company had not retained this money and instead taken an interest-
bearing loan, the value generated would have been less owing to the outgoing
interest payment. RE offers free capital to finance projects allowing for efficient
value creation by profitable companies.
A look at similar calculation for another stock, Walmart Inc. (WMT), indicates that
over the five-year period between January 2013 and January 2018, the mature
firm's stock price rose from $69.95 to $106.6, and net earnings retained were
$12.36 per share. The change in market value with respect to retained earnings
comes to ($106.6 - $69.95) / $12.36 = 2.965, which indicates that Walmart
generated almost triple the market value for each dollar of retained earnings.
Value Created
However, readers should note that the above calculations are indicative of the
value created with respect to the use of retained earnings only, and it does not
indicate the overall value created by the company. It is possible that in totality the
Apple stock may have generated more returns than the Walmart stock during the
period of study because Apple may have additionally made separate (non-RE)
large-size investments resulting in more profits overall. On the other hand,
Walmart may have a higher figure for retained earnings to market value factor,
but it may have struggled overall leading to comparatively lower overall returns.
The retained earnings are calculated by adding net income to (or subtracting net
losses from) the previous term’s retained earnings and then subtracting any net
dividend(s) paid to the shareholders.
Alternatively, the company paying large dividends whose nets exceed the other
figures can also lead to retained earnings going negative. Any item that impacts
net income (or net loss) will impact the retained earnings. Such items include
sales revenue, cost of goods sold (COGS), depreciation, and
necessary operating expenses.
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