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Advancing the Strategic Role of the Treasury: How Great Companies Become Great Stocks

High valuations and shareholder returns come with substantial benefits for corporate treasury and finance departments. Understanding the determinants of market value can help get them there.

By Chris Moore & Michael Chew | March 15, 2022 at 01:16 PM
Stock illustration: A light guides rowers in the right direction

Outsized market performance yields plenty of benefits for publicly traded companies. It typically leads to higher incentive compensation and signals investor confidence in management. For the treasury function, it may also help them fund operations on advantageous terms or issue stock at favorable prices.

A higher market capitalization reduces a company’s debt-to-equity ratio, which increases the likelihood of achieving an investment-grade credit rating (see Figure 1). Higher share prices can also serve as a useful currency to fund strategic mergers and acquisitions (M&A), since companies can either exchange stock or issue shares for cash to fund a transaction.

So, understanding how businesses drive market value is crucial not just for the C-suite at large, but for treasury and finance professionals especially. Research published by Fortuna Advisors offers insights into some characteristics that help companies produce exceptional market returns.

Our study examined how different metrics influenced total shareholder returns (TSR) for the members of the Russell 1000 over the five-year period ending in 2020. Two metrics stood out at first glance: One is revenue growth. The other is reinvestment effectiveness, a measure we developed to quantify how well companies convert reinvestment into revenue. Essentially, reinvestment effectiveness can serve as a barometer of how well management teams invest their capital and understand where value creation opportunities exist.

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