The value of a company in financial terms is the sum of all future Free Cash Flows (FCF) discounted by the Cost of Capital (WACC) to the present year.
Any initiative (Lean or otherwise) that aims at creating incremental value should result in an incremental Free Cash Flows (FCFs) in the coming years. FCF is the money available to the shareholders of a company in the form of dividends, after deducting the reinvested amount from the net profit after tax.
Free Cash Flows for the future years can be increased in three ways:
- Cut down the costs and pass on the savings to the shareholders. Reinvested amount in this case remains the same.
- Reduce the reinvestment, but generate the same results (profit margin % and growth %). This is possible if the reinvested amount is put to use more efficiently. In other words, incremental value can be created by increasing the Return On Invested Capital (ROIC).
- Finally, incremental value can be created by Revenue growth. Even if the % profit margin and % reinvestment remain the same, revenue growth causes the FCFs to increase, thereby increasing the value of the company.