Shareholder Value Added

Shareholder value added definition


Shareholder value added, or SVA, is defined as the measurement of the actual worth of a stock or portfolio of stocks as it compares to the worth of other investments. Typically, this is determined by calculating the likely profitability of the investment without factoring in risk. Shareholder value added is used to evaluate the probable return on investment in order to determine the desirability of the stock or portfolio under consideration; as such, it is one of a number of evaluation tools used by investors and analysts to select among investment choices.

Shareholder value added formula


Depending on the specific investment, the formula for calculating shareholder value added may vary slightly. However, the general shareholder value added formula can be expressed as the weighted average cost of capital subtracted from the company’s net operating profit after tax, or:

• SVA = Net operating profit after tax (NOPAT) – weighted average cost of capital (WACC)

In order to understand this formula fully, it’s essential to understand the component parts of the formula.

NOPAT is defined as the potential cash earnings of a company without regard to any outstanding debt or liabilities other than tax obligations. In general terms, NOPAT is the gross profit produced by a specific company or group of companies after taxes owed have been deducted. NOPAT is generally derived by multiplying the current operating income of a company by one minus the prevailing tax rate percentage, as in:

• NOPAT = Operating Income * (1 – Current Tax Rate)

WACC is derived by calculating the average cost of capital by taking each component of capital cost and multiplying it by its proportional weight in the overall value of the company or portfolio of companies. Analysts then average the results to determine how much the company or group is paying, on average, for the capital it has accumulated. WACC is derived using a fairly complex formula that integrates the cost of equity and debt, the market value of that equity and debt, and the percentage of financing costs attributable to each as well as the current corporate tax rate for the company.

Shareholder value added vs. market value added


Shareholder value added is derived from the actual or projected profits of a company and the actual or projected cost of capital; it should not be confused with market value added calculations, which are derived by subtracting the current market value of the company’s debt from the current market value of the company and provide a more general view of a company’s relative profitability in the marketplace.

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