Shareholder value added (SVA) measures a company’s value to shareholders by subtracting the cost of capital from net operating profit after tax (NOPAT). It is just one way to assess a company’s potential to compensate investors. Other measures include market value-added (MVA) and weighted average cost of capital (WACC). These tools help investors make informed decisions about where to allocate their money.
Shareholder value added (SVA) is just one way to measure the value of a company share to shareholders, or how it is likely to compensate those who invest money in it. In SVA, finance professionals take net operating profit after tax (NOPAT) and subtract the cost of capital. This helps to show a “value” for the company, even if it is somewhat subjective. It may sound complicated, but the basic idea behind SVA is this: that for a company to truly provide for its shareholders, returns on capital (profits) must exceed costs of capital, the total value of shares outstanding.
The story about shareholder value is that General Electric’s Jack Welch helped popularize the idea before later abandoning it. Some financial experts may hold a shareholder value system in high regard; others may not. SVA is just a general measure of value that can help show how a company’s capital balances against real profits.
The measure of shareholder value added is based on the weighted average cost of capital (WACC). For those outside of the financial industry, this term may also seem complicated. WACC is essentially the “balanced” valuation of different costs of capital. Common stock, preferred stock, bonds, and long-term debt are different types of cost of capital categories for a business. A weighted average cost of capital paradigm ensures that capital is valued fairly.
Another type of measure of corporate shareholder returns is a market value-added assessment. In market value added (MVA), the calculator takes all “capital claims” against the market value of a company’s debt and equity. The MVA is a frequently used tool to see how a company could return profits to shareholders.
All of the above is part of doing “due diligence” on a company. Investors use these types of tools to realistically look at projected returns before buying a company. In modern times, the application of more mathematics to financial markets has led to a much greater variety of items like SVAs and MVAs that help those with money see clearly the options for allocating that money to investments that will pay off. Not all traders and investors use SVA, but it can be helpful just to see that a business can make its own money and stay on its feet.
Smart Asset.
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