Abstract
M.Comm.
It is widely accepted that the main goal of management is to add shareholder value.
Stewart (1990) introduced Economic Value Added (EVA) and Market Value Added
(MVA) as a method of calculating the theoretical value added for shareholders. The
main purpose of the research was to test whether asset turnover (ATO) which is a
component of the EVA calculation, was a driver of shareholder value. The sample for
this study was restricted to eight South African listed manufacturing companies from
the industrial sector for the period, 2001 to 2010. The study found that ATO is not a
driver of price to book (P/B). However, in one sample company, namely, Pretoria
Portland Cement Company (PPC), ATO was found to be a strong driver of P/B. This
suggested that A TO is a driver of P/B if a company has economies of scale in a
product.
In companies, cash as a proportion of net assets (Cash/NA) has grown significantly
over the past thirty years. High cash holdings do not increase EVA as cash in the
bank returns only a risk-free rate and does not provide shareholders with the required
weighted average cost of capital (WACC). The secondary objective of the research
was to investigate whether Cash/NA inversely drives ATO. The same sample was
used for this test. The finding was that there was an inverse relationship between
Cash/NA and ATO but only at the 0.1 level of significance. Management can
therefore be reasonably sure that higher levels of Cash/NA ·will reduce A TO and
consequently RONA T as well. It follows that the trend towards higher levels of
Cash/NA should not be seen as healthy and reduced if possible.