What is shareholder value

The principle of shareholder value is easy to grasp – it simply
refers to the value of the shareholders’ investment. So when companies
talk about creating shareholder value, they are talking about increasing
the value of the shareholders’ investment.
Although the concept is reasonably easy to grasp, determining
whether or not companies are creating shareholder value is somewhat
more involved.
The bare bones
Creating shareholder value means increasing the value of
the shareholders’ investment.
How do you know if a company
is creating shareholder value?
In the previous chapter we established that there are two ways to
value a company: book value and market value. Suppose shareholders’
funds, as reported in a company’s balance sheet, total $10 million. This
is its book value. If the market value is $12 million, it is evident that
additional value of $2 million has been created in excess of the funds
physically invested in the business. This premium, as we have seen, is
called goodwill. However, simply measuring the value of goodwill in a
business does not tell us how effective the management team are at
creating it. If one company has goodwill valued at $200,000 while
another company has goodwill valued at $7 million, does it follow
that the latter company is more effective at creating shareholder value?
It is impossible to say, as we might be comparing companies that vary
greatly in size.
In order to assess how good management is at creating shareholder
value a powerful measure has been developed called the
:’market to book ratio
Market price per share
 =
 Market to book ratio

Book value per share