What Is Shareholder Value Added?

Market value added (MVA) is the difference between the market value of a listed company's stock and the adjusted book value of the company's stock and debt. In short, market value added is the wealth created by all the company's capital capital for its investors through the stock market, that is, the difference between the company's market value and its accumulated capital investment.

Market appreciation

Market value added (MVA) is the difference between the market value of a listed company's stock and the adjusted book value of the company's stock and debt. In short, market value added is the wealth created by all the company's capital capital for its investors through the stock market, that is, the difference between the company's market value and its accumulated capital investment. In other words, market value added is the difference between the realised value of a company and the original capital invested, and it directly shows how much a company has accumulated for shareholders

In theory, market value added is an accurate way to evaluate a company's wealth creation, and it is better than any other method. It calculates the difference between cash inflows and cash outflows, which is the difference between investors' capital invested in a company and the cash they receive from selling shares at current prices. Therefore, market value-added is a company's cumulative total increase or decrease in shareholder wealth, and is the best way to evaluate the company's management performance from the outside.

Another benefit of market value added is that it reflects the company's risk. The company's market value includes both the investor's judgment of risk and their evaluation of the company's performance. Therefore, market value-added can not only be used to directly compare companies in different industries, but even directly to compare the performance of companies in different countries. Market value added is the ultimate goal of the wealth creation race.

Market value added is equivalent to the financial market's estimation of a company's net present value, which is convenient for people to accept. If a company is regarded as a collection of many investment projects, the market value added is the total of the net present value of all projects. These projects include those that have already been completed, as well as those that are expected to start. The only difference between the company's net present value and market value added is that the net present value is estimated by the company itself, while the market value added is estimated by the financial market.

Market Value Added = Company Market Value-Cumulative Capital Investment

For enterprises, the higher the market added value, the better. High market value added indicates that companies have created more wealth for their shareholders. In theory, MVA is equal to the discounted value of future EVA, which means that MVA is the market's expected reflection of the company's ability to obtain future EVA. If the MVA is negative, it means that the value created by the company's operating investment activities is lower than the value of the capital invested by the investor in the company, which means that the investor's wealth or value is being lost.

For an enterprise, the purpose is to maximize MVA, not maximize enterprise value, because the latter can be achieved very simply by increasing investment.

The biggest difference between EVA and profit-based corporate performance evaluation indicators is that it also counts equity capital (opportunity cost) of shareholders into the cost of capital, and equity capital is no longer ignored as "free capital", which overcomes the traditional accounting profit without consideration The shortcomings of the cost of equity capital truly reflect the operating performance of the enterprise. The traditional accounting profit only deducts the interest on debt and does not consider the cost of capital of shareholders. As a result, many profitable companies may actually harm the investment of shareholders. For example, when the EVA value is negative, although the company's book may still have a profit at this time, its value is lower than the cost of equity (opportunity cost) of the shareholder's investment. Investment opportunity costs equal returns. For shareholders, the more economic value added (EVA), the better, which is completely consistent with the company's ultimate purpose of maximizing shareholder value. Considering the cost of all funds will force the operator to pay attention to all the capital costs related to inventory, accounts receivable, investment in fixed assets, etc., so as to use all the assets of the enterprise cautiously.

Economic value added is a more accurate and reasonable method for evaluating business performance so far. It converts accounting profits into profits in the economic sense, and it makes economic returns and accounting returns more unified. The EVA index contains a strong analysis function, which can better reflect the internal mechanism of business operations. EVA is used as an indicator to measure the business performance of the enterprise, and the success or failure of the operator is determined to determine the incentives and rewards for the operator, so that the interests of the operator and the shareholders are highly unified, so that the operator can truly pursue the pursuit of shareholders Maximize wealth as their goal.

The shortcoming of EVA is that it is based on the book value of the company's opening assets and does not consider fluctuations in market value. In response to this, in 1997, Jeffrey and other scholars revised the economic value added. The revised economic value added (REVA) is based on the market value of corporate assets, and its calculation formula is:

REVA = Adjusted operating net profit of the enterprise for the current periodthe market value of corporate assets at the beginning of the period × weighted average cost of capital ratio

The formula reflects the idea that the initial capital value of an enterprise is its market value. The difference between EVA and REVA is that EVA is based on the initial book value of capital and REVA is based on the initial market value of capital. What does REVA mean from the market? It is obviously more reasonable to calculate corporate value.

First, whether the stock market can truly evaluate the value of an enterprise has always been a questionable question. Although efficient market theory has a long history and is supported by many empirical studies, there are many similar counter-proofs. Due to information asymmetry, investors often make incorrect expectations, causing stock prices to deviate from the company's value.

Secondly, in the short term, changes in the overall stock market level can "overwhelm" managers' actions. Stock prices are affected not only by management performance, but also by the overall level of the stock market. The entire economy is in recession, and the general level of the stock market has fallen. Although a company's performance is very good, its stock price will also decline, but it is less than other companies. The stock price goes up and down every day, not because the company's performance changes every day.

Again, only after the company is listed will there be a fair market price, and its market value added can be calculated. Estimates of the market value of unlisted companies are often unreliable. Most companies are not listed, and there is no appropriate market value estimation data, which limits the application of market value added.

Finally, even a listed company can only calculate its overall economic value added. It cannot calculate its economic value added to subordinate departments and internal units, and it cannot be used for internal performance evaluation.

MVA does not consider the opportunity cost of investing capital.

MVA does not consider the medium-term cash returns to shareholders.

MVA cannot be applied at the company's departmental level (such as SBU), nor can it be used for unlisted companies.

In addition to having important guiding significance for decision-making, economic value added is also an important indicator that directly measures the market value of any enterprise. Specifically, economic value added is directly linked to market value added.

Market value added = discounted value of future economic value added

Market Value Added = Company Market Value-Company Book Capital Value

Mature investors use many different methods to value stocks reasonably, but all of them are based on market valuation fundamentals. In fact, the market value-added of any company is worth the discount of the future economic value-added by the investors.

Market value-added is a key performance measure, indicating that the value-added portion of capital invested by shareholders is directly related to the creation of shareholder wealth. Market value added signifies the ability of a powerful company to make good use of scarce resources. Economic value added works because it deducts the cost of capital and minus the minimum investment return that investors expect. Therefore, when the market believes that the company's economic value added will be zero, from the perspective of economic value added, the company just achieves a balance of payments, investors only get the minimum return, and the company's market value added will be zero . At this time, the market value of the enterprise is equal to the book value of the funds.