Stock Price Implications

The implications stock price has on other performance measures include:

• ROS: Management wants to improve ROS.
• Asset turnover: Difficult to predict. Management wants to avoid stock issues and pay dividends, so there is downward pressure on the asset base. However, management wants to increase ROS, so there is pressure to increase the asset base.
• ROA: Improves.
• ROE: Improves.
• Market cap: Increases as stock price goes up.
• Cumulative profit: Increases.
• Market share: Hard to predict. Often there is some tradeoff in the short run between profits and Market Share. Management is reluctant to reduce profits, but knows that increasing sales volume while holding ROS constant must increase asset turnover, and therefore improve ROA and ROE. At best, we see modest improvements in market share.

At a big picture level, emphasizing stock price has much the same effect as ROE. Managers are reluctant to issue stock and accumulate earnings, but feel pressured to grow the company. In the long run, emphasizing stock price can stunt a company because of limits placed on reinvestment.