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EVA and MVA

The document discusses Economic Value Added (EVA) and Market Value Added (MVA) as key metrics for assessing a company's valuation. EVA measures financial performance by evaluating the profit generated above the cost of capital, while MVA represents the difference between a company's market value and the capital invested by shareholders and bondholders. Both metrics have advantages and limitations, with EVA focusing on performance and MVA on accumulated wealth over time.

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Siddhartha Chauhan
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6 views13 pages

EVA and MVA

The document discusses Economic Value Added (EVA) and Market Value Added (MVA) as key metrics for assessing a company's valuation. EVA measures financial performance by evaluating the profit generated above the cost of capital, while MVA represents the difference between a company's market value and the capital invested by shareholders and bondholders. Both metrics have advantages and limitations, with EVA focusing on performance and MVA on accumulated wealth over time.

Uploaded by

Siddhartha Chauhan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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EVA and MVA

Historical performance measures


in an organisation includes:

 Profit Maximisation – age old


 Wealth Maximisation - matured
 Value Maximisation – today’s
wisdom
Introduction
There are numerous ways that investors
and lenders can estimate the valuation of
a company. The most common metrics
used to determine a company's value
include economic value added (EVA) and
market value added (MVA). However,
there are distinct differences between
these two valuation strategies, and
investors need to be aware of how to use
each.
EVA
 New York Based Consulting firm Stern
Steward & Co. developed the concept of
EVA in 1982.
 Economic Value Added is a value based
performance measure that appreciates
values created by the management for
its owners.
 It evaluates how well the organisation
performs in relation to its objectives –
wealth maximisation for the
shareholders.
 It is most directly linked to creating
What is EVA?

Economic Value Added (EVA) is a measure


of financial performance based on the
concept that all capital has a cost and that
earning more than the cost of capital
creates value for shareholders. It is after-
tax net operating profit (NOPAT) minus a
capital charge. It is true economic profit
consisting of all costs including the cost of
capital. If a company’s return on capital
exceeds its cost of capital it is creating
true value for the shareholder.
EVA decisions

If EVA is Positive, business has


created wealth for shareholders
If EVA is Negative, business
has destroyed wealth for
shareholders
Advantages of EVA
 It helps the company in monitoring the problem areas and hence
taking corrective action to resolve those problems.
 It can also improve the corporate governance of the company
because since a higher EVA implies higher bonuses to the
managers they will be working hard and also honestly which in
turn augurs well for the company.
 Unlike accounting profit, such as EBIT, Net Income and EPS, EVA
is Economic and is based on the idea that a business must cover
both the operating costs as well as the capital costs and hence it
presents a better and true picture of the company to the owners,
creditors, employees, shareholders and all other interested
parties.
 It also helps the owners of the company to identify the best
person to run the company effectively and efficiently.
 Using EVA company can evaluate the projects independently and
hence decide on whether to execute the project or not
Limitations of EVA
It is considered to be a short term measure
of financial performance
It is not a suitable measure for a company
which has invested heavily today but
expects returns in long term
It is prone to estimation errors inherent in
calculating Cost of Capital
EVA is based on financial accounting
methods that can be manipulated by
managers.
MVA (Market value added)
Market value added
 (MVA), on the other hand, is simply the
difference between the current total market
value of a company and the capital
contributed by investors (including both
shareholders and bondholders). MVA is not a
performance metric like EVA, but instead is a
wealth metric, measuring the level of value a
company has accumulated over time. As a
company performs well over time, it will
retain earnings.
MVA
If the MVA is positive, the firm has added
value. If it is negative, the firm has
diminished value

Calculation of MVA:
MVA= (Total market value
of Stock + Total market
value of Debt) – Total
investor supplied capital
Limitations of MVA
Market Value Added (MVA) can not be
calculated at divisional (Strategic Business
Unit) level and can not be used for private
held companies.
 MVA does not take into account the interim
cash returns to shareholders.
MVA does not take into account the
opportunity costs of the invested capital.

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