Value Based Management: TATA STEEL

 

A company's worth is determined by its future cash flows, adjusted for present value. Value is generated only when a company's investments yield returns that surpass the cost of that capital. Value-based management (VBM) expands on these concepts by examining how companies apply them to make both significant strategic choices and everyday operational decisions. When implemented effectively, VBM is a management strategy that harmonizes a company's overall goals, analytical methods, and management processes to ensure that management decisions are focused on the key drivers of value.

The spreadsheet includes a number of important financial metrics, such as net income, equity employed, cost of equity, residual income, NOPAT, capital employed, WACC, economic value added, market value added, book value of equity, book value of debt, market value of equity, market value of debt, current value of operations, future growth value, return on invested capital, EVA spread, and total shareholder return.

Some interpretations of the data in the spreadsheet:

• Net income: Tata Steel’s net income decreased from $33.011 million in 2022 to $15.495 million in 2023. This represents a decrease of 53%.
• Equity employed: Tata Steel’s equity employed remained relatively constant between 2022 and 2023.
• Cost of equity: Tata Steel’s cost of equity decreased from 11.60% in 2022 to 10.50% in 2023. This is a positive sign, as it means that the company's cost of raising capital has decreased.
• Residual income: Tata Steel’s residual income decreased from $32.869 million in 2022 to $15,366.76 in 2023. This represents a decrease of 53%. Residual income is a measure of the company's profitability after accounting for the cost of equity.
• NOPAT: Tata Steel’s NOPAT decreased from $35338.635 million in 2022 to $18938.7016 million in 2023. This represents a decrease of 47%. NOPAT is a measure of the company's profitability before interest, taxes, depreciation, and amortization.
• WACC: Tata Steel’s WACC decreased from 10.30% in 2022 to 8.20% in 2023. This is a positive sign, as it means that the company's overall cost of capital has decreased.
• Economic value added (EVA): Tata Steel’s EVA decreased from $35.190 million in 2022 to $4.754 million in 2023. This represents a decrease of 86%. EVA is a measure of the company's profitability after accounting for the cost of capital.
• Market value added (MVA): Tata Steel’s MVA increased from $399.035 million in 2022 to $553,437.37 in 2023. This represents an increase of 39%. MVA is a measure of the value that the company has created for its shareholders.
• Return on invested capital (ROIC): Tata Steel’s ROIC decreased from 24.52% in 2022 to 12.63% in 2023. ROIC is a measure of the company's profitability relative to the amount of capital that it has invested.
• EVA spread: Tata Steel’s EVA spread decreased from 14.22% in 2022 to 4.43% in 2023. The EVA spread is a measure of the company's profitability relative to its cost of capital.
• Total shareholder return (TSR): Tata Steel’s TSR was -1.31% in 2023. TSR is a measure of the total return that shareholders have received, including both stock price appreciation and dividends.

Overall, the financial performance of the company decreased between 2022 and 2023. This is reflected in the decreases in net income, residual income, NOPAT, EVA, and ROIC. However, there are some positive signs, such as the decreases in the cost of equity and WACC, and the increase in MVA.