The Concept
The process by which a company enhances the market value of the capital entrusted to it by its shareholders. A basic Measure for any commercial venture. It is achieved by the rational actions of a company in a sustained
manner.
The Objective
To buy “Businesses at a price substantially LOWER than their Intrinsic value”.
The lower the market value is compared to the intrinsic value, the higher is the margin of safety.
To create value to shareholders.
Parameters Used for the Ranking of Wealth Creators…
EVA
MVA
EVA is the net operating cash profit (NOPAT) earned by the company less the cost of capital – where the non – cash expenses like depreciation are added back to NOPAT and non – operating items are reduced from the cost of capital.
EVA = (NOPAT– non-recurring items + Depn.) –cost of cap.
MVA (Market Value Added) is the value that the current share-holders can get over and above the equity ownership represented by the financial accounts.
It represents the market’s perception of the company’s ability to add value to the current book value from future earnings.
MVA is a measure of the value added by the company’s management over and above the capital invested in the company by its investors.
MVA = Market value of the firm – Economic capital.
MVA = Market Capitalization – Book Value of net worth
Why EVA and MVA?
Both these measures focus on Capital Efficiency, instead of just absolute measures.
MVA tells us how much wealth has been created or destroyed by a company relative to original investment.
The company with the highest market Capitalization may not be the biggest wealth creator.
MVA - a better measure in the long run – however is affected from the vagaries of the stock market.
That is why, for sustainable wealth creation, companies should focus on improving their business’ fundamental economic performance i.e. EVA.
The process by which a company enhances the market value of the capital entrusted to it by its shareholders. A basic Measure for any commercial venture. It is achieved by the rational actions of a company in a sustained
manner.
The Objective
To buy “Businesses at a price substantially LOWER than their Intrinsic value”.
The lower the market value is compared to the intrinsic value, the higher is the margin of safety.
To create value to shareholders.
Parameters Used for the Ranking of Wealth Creators…
EVA
MVA
EVA is the net operating cash profit (NOPAT) earned by the company less the cost of capital – where the non – cash expenses like depreciation are added back to NOPAT and non – operating items are reduced from the cost of capital.
EVA = (NOPAT– non-recurring items + Depn.) –cost of cap.
MVA (Market Value Added) is the value that the current share-holders can get over and above the equity ownership represented by the financial accounts.
It represents the market’s perception of the company’s ability to add value to the current book value from future earnings.
MVA is a measure of the value added by the company’s management over and above the capital invested in the company by its investors.
MVA = Market value of the firm – Economic capital.
MVA = Market Capitalization – Book Value of net worth
Why EVA and MVA?
Both these measures focus on Capital Efficiency, instead of just absolute measures.
MVA tells us how much wealth has been created or destroyed by a company relative to original investment.
The company with the highest market Capitalization may not be the biggest wealth creator.
MVA - a better measure in the long run – however is affected from the vagaries of the stock market.
That is why, for sustainable wealth creation, companies should focus on improving their business’ fundamental economic performance i.e. EVA.