Ultimate Objective: Maximizing Intrinsic Value per ShareThe intrinsic value of any business is calculated by taking the sum of all cash flows into and out of the business and then discounting those cash flows by an appropriate interest rate. Operating under the mandate of maximizing per share intrinsic value is important because that maximization ultimately leads to growth in shareholder value. Our focus on intrinsic value maximization is crucially important for one very distinct reason: earnings per share (EPS) growth does not necessarily lead to intrinsic value per share growth. Earnings, with very little managerial effort and without running afoul of the law, can be readily altered to produce EPS growth. For example, by simply offering its customers more liberal credit terms, a business can manufacture earnings growth. Purchases on credit create a legitimate sale and corresponding profit. Yet until such a profit is converted into cash flow upon collection of the corresponding receivable, there is no growth in intrinsic value.
Paragon Technologies' Chairman Sham Gad's Annual Letter To Stockholders
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