What are the main Ingredients to determining value?

Main ingredients to creating and determining value in a business are Excellent capital allocation (ROIC), Consistent growth in sales, A "good business" with a competitive edge (CAP), Focused and passionate management Effective communication among all constituencies.

To develop a thorough appraisal of a company's value, you must consider both quantitative and qualitative ingredients. The first and foremost quantitative ingredient to creating and determining value is capital allocation (ROIC). We can refer to this as the primary value driver. The higher the after-tax return a company is able to earn on its invested capital, the greater the amount of owner earnings produced. Another quantitative ingredient to creating and determining value is the annual growth rate (Revenue->Net Profit margin growth) a company is able to achieve.

The most important qualitative ingredient in determining value is assessing the type of business we are interested in. Another key qualitative ingredient to creating and determining value in a company is management. Common traits among good managers are excellent leadership skills and a "passion" for their business. When smart individuals have a single-minded focus and are passionate in executing their vision, tremendous value is created.

The final qualitative ingredient that is important in creating and determining value is communication. What is effective communication, and how does it contribute to creating value? An excellent communication system maximizes long-term cash flow by creating an environment in which business decisions - especially the investment of capital - are understood by all constituencies with a vested interest in the company: stockholders, employees, customers, suppliers, and the community. In this case, the investment of capital includes human capital as well as monetary capital. In summary, the main ingredients to creating and determining value in a business as follows:
Excellent capital allocation: ROIC
Consistent growth in sales : Growth
A "good business" with a competitive edge (better technology, stronger brands, copyrights): CAP
Focused and passionate management
Effective communication among all constituencies

If a business receives superior returns on its invested capital, and is maximizing growth in its core business, it should return excess earnings to owners. The owners can then make a decision, bad or good, to diversify their holdings and to reallocate money into other businesses. If a company does decide to maintain excess owner earnings to grow outside its core business, the growth should be in a business in which management is competent and fully understands. There should also be opportunity in the new business to achieve a similar or higher return on invested capital than in the core business.