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stock market for dummies (me)
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| pmoisse |
Ok, so I was having a discussion today with my new supervisor about some pending layoffs and pay reductions coming up for my company (based in the Bay Area), and there was a memo sent out by the CEO said that this had to happen to maintain shareholder value.
I've heard this term kicked around quite often, but I just need some clarification (and wiki wasn't clear enough).
My company missed Q4 earnings and so there's a scramble to cut costs to maintain profitability. The company has huge cash reserves to fall back on though.
Now, my question is how does the share price affect the company cash flow? The company did a share buy back in Q3 to boost the earnings per share, and also cut a bunch of staff around the same time.
If I sell my shares in the company, I get the money for them based on what someone else within the market will buy them for.
How does the company get a cut?
Thanks! |
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| jerZ07002 |
| quote: | Originally posted by pmoisse
Ok, so I was having a discussion today with my new supervisor about some pending layoffs and pay reductions coming up for my company (based in the Bay Area), and there was a memo sent out by the CEO said that this had to happen to maintain shareholder value.
I've heard this term kicked around quite often, but I just need some clarification (and wiki wasn't clear enough).
My company missed Q4 earnings and so there's a scramble to cut costs to maintain profitability. The company has huge cash reserves to fall back on though.
Now, my question is how does the share price affect the company cash flow? The company did a share buy back in Q3 to boost the earnings per share, and also cut a bunch of staff around the same time.
If I sell my shares in the company, I get the money for them based on what someone else within the market will buy them for.
How does the company get a cut?
Thanks! |
I'm not sure I entirely understand your question, but I can address a few issues.
Cash reserves is an asset on the company's balance sheet an is not an item on the income statement. Profitability is not affected by cash reserves (profitability only relates to the excess of income over expenses in a fiscal year - cash reserves is presumably the build up of cash (in the form of short term deposits) from profits, the issuance of indebtedness, and the acquisition of other short term liabilities). That is why cost cutting is needed (to increase profitability a company can increase revenue or decrease expenses). Maintaining a certain profit level is important for shareholder value because under a discounted cash flows valuation method the stock price is directly affected by expected cash flows (normally an after tax net income number, i believe).
Stock price doesn't directly affect the company cash flow, except to the extent company stock is used as security for corporate debt.
A company will conduct a share-buy-back when the stock is undervalued as a 'voluntary' dividend cash-out. Meaning, shareholders that want to cash out can opt to take a one time payout, which is equivalent to their portion of the expected cash flows of the corporation. The share-buy-back doesn't affect profitability or the bottom line of the balance sheet(cash reserves will be swapped for treasury stock). |
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| pmoisse |
Thanks
This makes a bit more sense. I'm not sure if the company has any external debt or not so that could be why they're so paranoid about the stock price. |
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| Krypton |
| My understanding is they are laying people off to maintain shareholder value. Well, the less people they have to pay for the same amount of work equals more revenue and net income per employee which maintains or boosts shareholder value as a result. Productivity is increased. That is...if they can produce the same amount of product/service with less inputs. |
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| pmoisse |
^ but then how does that affect why the shares are attractive to buy or not?
How does a high share price mean better things for the company? Why is a low share price viewed as bad by the company?
I'm just trying to understand how the trading of shares affects company revenues, cash flow etc. or if it just happens off to the side and when the price is high the company issues more stock?
(sorry for the retarded questions) |
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| Shakka |
| quote: | Originally posted by pmoisse
^ but then how does that affect why the shares are attractive to buy or not?
How does a high share price mean better things for the company? Why is a low share price viewed as bad by the company? |
Simple. Public perception. It's an issue of optics. Aside from trying to meet exchange requirements to maintain a listing, why do companies split or reverse split their stocks? It accomplishes nothing. Cutting costs boosts the bottom line which can have the effect of creating a higher share price based on the same P/E multiple (or whichever multiple you like to use). Public sees stock price rising, they perceive it to be a positive read through on the underlying company.
| quote: | I'm just trying to understand how the trading of shares affects company revenues, cash flow etc. or if it just happens off to the side and when the price is high the company issues more stock?
(sorry for the retarded questions) |
Generally it doesn't. The stock price doesn't do anything for a company's revenues or cash flows. The only time the company realizes a benefit from their stock is when they sell shares directly to the public through an IPO or a secondary stock offering. Otherwise, the stock is just a reflection of public perception and investor psychology. |
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| Shakka |
| quote: | Originally posted by Krypton
My understanding is they are laying people off to maintain shareholder value. Well, the less people they have to pay for the same amount of work equals more revenue and net income per employee which maintains or boosts shareholder value as a result. Productivity is increased. That is...if they can produce the same amount of product/service with less inputs. |
Not more revenue, rather higher earnings. They company has to physically sell more units to generate higher revenues. However, if they can sell the same number of units with less associated costs, they boost their profitability. This is essentially maximizing capacity utilization to realize greater economies of scale. |
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| Fir3start3r |
| Try being with Canwest (where I'm at); we're in a world of e here...:mad: |
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| Krypton |
| quote: | Originally posted by pmoisse
^ but then how does that affect why the shares are attractive to buy or not?
How does a high share price mean better things for the company? Why is a low share price viewed as bad by the company?
I'm just trying to understand how the trading of shares affects company revenues, cash flow etc. or if it just happens off to the side and when the price is high the company issues more stock?
(sorry for the retarded questions) |
Well you'v got it backwards...share price is more a reaction to better or worse things for the company. A company's revenue or profit is not a reaction to share price. The trading of shares is more affected by company revenues and cash flow, etc. than affecting. Many companies issue more shares at high prices, and some do little to none. Look at Berkshire Hathaway. They never split shares. As a result, the stock price is over $100,000 per share. |
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| jerZ07002 |
| quote: | Originally posted by Krypton
Well you'v got it backwards...share price is more a reaction to better or worse things for the company. A company's revenue or profit is not a reaction to share price. The trading of shares is more affected by company revenues and cash flow, etc. than affecting. Many companies issue more shares at high prices, and some do little to none. Look at Berkshire Hathaway. They never split shares. As a result, the stock price is over $100,000 per share. |
the way you worded that makes it sound like a company receives a cash flow benefit from stock splits. In fact, a company doesn't even issue stock in a stock split. By law, in a stock split, a share of stock converts into X number of shares. By contrast, in a stock issuance the company issues treasury stock or newly issued stock to the public in return for money (normally). When a company issues stock, clearly, there is a cash flow benefit (although not a revenue benefit - it's a capital contribution).
Most companies conduct a stock split because they have a target range for share price: normally, i think it is between 20 - 100. The reason being that it enhances liquidity, in hopes that increased trading enhances the share price. |
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| Infinit |
you guys are missing some major stuff here.
shareholders/stockholders are the owners of the company. the management/executives answer to the board, and the board answers to the shareholders. thats why if you own shares of a publicly traded company, you receive proxy material to vote on decisions for the company you own a piece of.
so this should be obvious for you guys- the directors and the management under them have an obligation to the owners (shareholders) of the company to maintain value.
if the interests of the shareholders are ignored, then you're in fact ignoring the owners of your company. |
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| jerZ07002 |
| quote: | Originally posted by Infinit
you guys are missing some major stuff here.
shareholders/stockholders are the owners of the company. the management/executives answer to the board, and the board answers to the shareholders. thats why if you own shares of a publicly traded company, you receive proxy material to vote on decisions for the company you own a piece of.
so this should be obvious for you guys- the directors and the management under them have an obligation to the owners (shareholders) of the company to maintain value.
if the interests of the shareholders are ignored, then you're in fact ignoring the owners of your company. |
we didn't miss anything. Pmoisse did NOT ask why management of a company has a responsibilty to maintain shareholder value. |
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