What is Shareholder Value Added?

A. Leverkuhn
A. Leverkuhn
Man climbing a rope
Man climbing a rope

Shareholder value added (SVA) is just one way of measuring what a company stock is generally worth to shareholders, or how it is likely to compensate those who invest money into it. In SVA, finance pros take the net operating profit after tax (NOPAT), and subtract the cost of equity. This helps to show a “value” for the company, albeit a somewhat subjective one. It can seem complicated, but the basic idea behind SVA is this: that for a company to truly provide for its stockholders, equity returns (profits) have to exceed equity costs, the total value of outstanding shares.

The story on shareholder value added is that General Electric’s Jack Welch helped to popularize the idea before later abandoning it. Some financial experts may hold a shareholder value added value system in high esteem; others may not. The SVA is just a general value measurement that can help to show how equity is balanced against real profits from a company.

A shareholder value added measurement is based on Weighted Average Cost of Capital (WACC). To those outside of the financial industry, this term can seem complicated as well. WACC is essentially the “balanced” valuation of different costs of capital. Common stock, preferred stock, bonds, and long term debt are all different kinds of cost of capital categories for a business. A weighted average cost of capital paradigm ensures that these are fairly valued.

Another kind of measure of corporate returns to shareholders 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 an often-used tool for looking at how a company might return profit to shareholders.

All of the above is part of doing “due diligence” on a company. Investors use these kinds of tools to look realistically at projected returns before buying into a company. In modern times, the application of higher math to financial markets has led to a much greater variety of items like SVA and MVA that help those with money to look clearly at options for allocating that money toward investments that will pay off. Not all traders and investors use SVA, but it can be helpful just to see that a company can make its own money and stand on its own two legs.

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