Market value added (MVA) is simply a corporate finance technique in order to measure the success of the business management team’s use of assets entrusted to them.
Think of it in these terms: MVA is an indication of how successful corporate leaders have utilized the company’s assets by increasing the value for the shareholders.
Simply put, the MVA is a tangible way to measure the success of the management team.
The MVA equation is rather simplistic in its development. MVA equals market capitalization minus shareholder’s equity.
This equates to:
Market Value Added (MVA) = Market Capitalization – Shareholder’s Equity
Market capitalization, or market cap, is often known as the market value of equity.
This figure is calculated by taking the company’s total number of outstanding shares and dividend it by its current share price.
Therefore, you can calculate the MVA by using this adjusted formula:
MVA = Shares Outstanding x Current Share Price – Shareholder’s Equity
Company A’s stock is currently selling at $5.2 a share, and the company has a total of 12 million shares outstanding.
Therefore, the company reports its total shareholder value to be $26 million.
In order to calculate the MVA of this company, you can simply use the adjusted MVA formula provided above.
Market Value Added (MVA) = 12 x 5.2 – 26 = $36.4 million
At its heart, MVA is an analysis that is meant to be utilized by internal management and employees of a corporation.
It is specifically meant as a way of management simply to measure their success at utilizing the assets of the company to increase the market value for shareholders.
In its pure sense, this equation is not really meant to be utilized by individual investors.
However, investors can utilize this information as a way of gauging the success of management; however, there are caveats that the investor will have to keep in mind in this analysis.
As mentioned previously, there are potential concerns that you must keep in mind when utilizing MVA analysis.
One issue is that MVA measures the success of all investments since day one of a corporation’s operation. This means that the measure will actually be including the potential for several different management teams.
For example, a 100-year-old company may have had five or more different senior management teams it’s lifetime, with each being successful or unsuccessful its own terms.
Another potential problem is that the current market price or value of the company represents an accurate picture of the business.
Stock values are often calculated based upon future expectations of the stock and company, rather than past successes.
Therefore, the current market value of the company may not accurately represent the successes of the past as the company may be facing challenges in the future.
Another consideration is that the MVA considers the business as a whole, rather than individual parts.
Thus, the company may have several divisions, which are underperforming, while another division might be a major producer for the business increasing the MVA.
In this situation, management should replace these under producing divisions or at least rectify the situation; however, MVA analysis would still indicate that the business is operating successfully.