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An Important Investing Question To Ask: Who Are The Main Stakeholders That Can Benefit From A Company?

The question given in the title of this article is something important that an investor needs to ask him or herself when analysing any firm.

But first, we need to understand the difference between a shareholder and stakeholder of a company.

A shareholder is basically a person or organisation who owns shares of a company; in so doing, the person or organisation become part-owners of the firm. A shareholder benefits from a company when the company earns a profit or pays out a dividend.

Meanwhile, a stakeholder is simply any person or organisation who might be affected by the existence and actions of the company. In other words, employees, shareholders, customers, suppliers, and even the wider community, can all be considered as the firm’s stakeholders.

Who benefits the most

Now that we know who or what stakeholders are, each time we analyse a company, we have to find out which stakeholder stands to benefit from the existence of the firm. This is because it is not always shareholders who get to enjoy the spoils.

We can take airlines such as Singapore Airlines Ltd (SGX: C6L) and Tiger Airways Holdings Limited (SGX: J7X) as examples.

Both companies provide great utility for their customers by allowing them to travel around in the world in an affordable, comfortable, and efficient manner. Both airlines also help enrich the wider community by helping to bring in tourists from all over the world into Singapore and boosting the economy.

However, both firms have not been particularly beneficial for their shareholders.

Singapore Airlines' return on equity

Source: S&P Capital IQ

The chart above shows Singapore Airlines’ returns on equity over its past five fiscal years and you can see that the financial figure has mostly been around the 3% mark; that’s a dismal performance and is likely to have been partly responsible for the 28% decline that Singapore Airlines’ shares have suffered over the past five years since June 2010.

Tiger Airways net income (2)

Source: S&P Capital IQ

Meanwhile, Tiger Airways has hardly been profitable (see chart above) ever since it got listed in January 2010. In a similar manner to Singapore Airlines, Tiger Airways’ dreadful business results had likely driven its shares to an 84% decline since June 2010.

The experience of the two airlines are good examples of how a shareholder might not always be the one that benefits the most from a business.

Foolish Summary

Companies exist to serve many stakeholders. As an investor, we need to find out if shareholders can actually benefit from the existence of a company.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn’t own shares in any companies mentioned.