The main thing is to maximize profits → maximize shareholders' wealth → maximize enterprise value

I feel that financial management textbooks in China tend to maximize enterprise value

But what I am studying now is written by Ross < Corporate finance > Only shareholder wealth maximization has been mentioned in the world

Now there is a relatively hot concept --EVA maximization

Profit Maximization (profit maximization) financial management goal was once a widely spread view in China and the West, especially in the practical field. One of its expressions is the total profit, which can no longer meet the needs of financial management in the new era with the continuous updating of financial management concepts. One of the great disadvantages is that it does not reflect the relationship between the profit and the invested capital, and it cannot scientifically explain the level of economic benefits of enterprises. The views of maximizing earnings per share and the rate of return on shareholders' equity are gradually developed in consideration of this shortcoming. They are both different and closely related, with their own strengths and some similarities.

1. Maximizing earnings per share is abbreviated as EPS

This view holds that the profit of an enterprise is linked with the capital of shareholders, and the financial objectives of the enterprise are summarized by earnings per share to avoid the shortcomings of the goal of "maximizing profits". Where EPS= net profit/total number of common shares. This view can be regarded as a direct reflection of the profit maximization view in listed companies. In addition to the advantages of the profit maximization view, it takes into account the relationship between investment and capital and reflects the general requirements of shareholders, but it does not avoid the following shortcomings.

① time value of money; The existing schemes A and B have the same investment, and both can bring 2 million profits. Scheme A can make a profit within one year, but the existing scheme is divided into four years, with an annual income of 5, yuan. Such a seemingly simple choice, the EPS view does not reflect this, and does not consider the time value of money.

② risk; The balance between risk and reward is the basic concept of finance. Under the condition that the investment amount, expected profit and time value of money of the two schemes are the same, if the profit of A is stable, it is very likely that it will not reach the expected profit, or even lose money, and the EPS view has not been considered.

one of the ways to solve this problem is to use the Decision Theory in the quantitative method to give probability to the expected possible profit and loss figures, and then compare them with the expected interest rate instead of the original expected profit. But the following two problems remain unsolved.

③ dividend policy; Profits are only book figures, and shareholders actually get different benefits and profits. The company's dividend policy will affect the actual interests of shareholders. If the company's policy is not to pay dividends, the book wealth of shareholders will increase day by day because the company has profits, but the "paper wealth" for n years has no practical significance to shareholders.

④ accounting methods; Under the norms of generally accepted accounting principles, the management may choose favorable depreciation and inventory evaluation methods after considering the impact of income tax to achieve EPS goals, but there is little substantive content for shareholders.

In addition, the increase in profit does not necessarily mean that EPS will definitely increase; For example, a company has 1, shares of common stock, with a net profit of 2, yuan and EPS=2. If I have 1, shares of the company, I can earn 2, yuan. If the company issues another 1, shares, it is estimated that the net profit will increase by 1, yuan, that is, the total share capital will be 2, yuan, the total profit will be 3, yuan, and the EPS = 1.5,1 shares will only bring in 1,5 yuan.

EPS can't truly reflect the business performance of enterprises; For example, a company had total assets of 1 million yuan last year, including liabilities of 4 million yuan, capital reserve of 2 million yuan (1 yuan per share) of 1.5 million yuan, surplus reserve of 1.8 million yuan, undistributed profit of 7, yuan and net profit of 48, yuan, so last year's earnings per share was 48/2=.24 yuan, and the Rate of Return on net assets was 8% (48/return). Assuming that the undistributed dividend of 48, yuan last year is all undistributed profit, the total equity of last year is 6.48 million yuan, and its share capital remains unchanged. With a net profit of 5, yuan this year, the earnings per share will be 5/2=.25 yuan, and the ROR will be reduced to 7.716%(5/648). The reason is that enterprises use more non-equity equity funds (capital reserve, surplus reserve and undistributed profits) to create lower net profit. Because of this, the concept of return rate of shareholders' equity has been triggered.

second, the rate of returns on common stockholders' equity is abbreviated as ROE

the rate of return on shareholders' equity is an indicator to measure investors' returns. It also summarizes the performance, profitability, asset management and financial control of enterprise management. Formula: ROE= (net profit/shareholders' equity) *1%. Like EPS, ROE focuses on net profit first, but the difference is that EPS focuses on the total number of common shares, while ROE focuses on shareholders' equity. Still taking the above example as an example, under the premise that the share capital is both 2 million, the ROE has been significantly improved.

In fact, the shortcomings of EPS are also the shortcomings of ROE. After all, both of them are based on net profit. However, it should be noted that the total profit does not represent the wealth of shareholders. As mentioned earlier, dividend policy will have an impact on profit distribution. The goal of an enterprise is to maximize profits, so it is reasonable for the enterprise to keep profits for investment and profit-making, which may not be in line with the interests of shareholders, but it is a reasonable choice under the condition of maximizing profits.

both p>EPS and ROE reflect the requirements of maintaining and increasing the value of assets, and it is also understood and accepted that they are both important indicators to judge the profitability of listed companies, and they have been paid great attention by all parties involved in the securities market. However, some people are skeptical about whether ROE truly reflects the profitability of listed companies. They use the profit manipulation behavior of some listed companies as an argument to infer that listed companies have manipulated ROE.

both of them are only suitable for listed companies, which makes their application very limited; One-sided emphasis on the increase of profit may lead to short-term uneconomical behavior; Too much emphasis on the interests of shareholders, not enough attention to other related parties; It is very likely that corporate social responsibility awareness is not strong. These problems need to be well solved by adjusting the company's interest relationship.

3. Economic value Added is abbreviated as EVA and several problems in financial management objectives

In p>1993, the presidents of many companies, such as IBM,GM, Westinghouse Electric and Kodak, were dismissed by the board of directors for the simple reason that the important shareholders of these companies, CalPers Fund, used the veto power, and the index of CalPers Fund's assessment and operation was EVA. EVA is a new type of company performance measurement index, which overcomes the defects of traditional indicators and accurately reflects the value created by the company for shareholders in a certain period of time. EVA, initiated by Stern Stewart, has been applied in more than 4 companies around the world, including Coca-Cola, Siemens, Sony, US Postal Service, Singapore Airlines and other world-renowned enterprises.

EVA= after-tax operating profit-capital investment × weighted capital cost ratio

= net operating profit-tax-the cost of capital used to generate operating profit

The basic idea of EVA is that the income gained by capital should at least compensate the risks borne by investors, and shareholders'

wealth is divided into two parts, namely equity and EVA, which scientifically describes the realization degree of shareholders' wealth.

Several issues that must be carefully considered in financial management

Profit: maximize long-term profit and seek the maximization of short-term profit on this premise;

flexibility: maintain the flexibility of financial scheduling to avoid the problem of ineffective adjustment in unexpected situations;

liquidity: maintain the solvency of the enterprise and ensure that all kinds of due funds can be paid on time;

risk: control the risk at an appropriate level to avoid taking unnecessary risks for seeking to expand profits;

dividend: under the framework of maximizing the stock price, it is absolutely necessary for enterprises to pay dividends and formulate appropriate dividend policies to maximize the current cash value of expected dividends;

make good use of financial resources: carefully control cash in and out, find problems as early as possible and try to remedy them.