Market Value Added and Economic Value Added

Market Value Added (MVA) and Economic Value Added (EVA) are two financial performance measures used by companies to assess their value creation and profitability. Here is a step-by-step explanation of each concept:

1. Market Value Added (MVA):

   • MVA is a measure of the difference between the market value of a company and the capital invested in it.
   • To calculate MVA, you need to determine the market value of the company, which is the current stock price multiplied by the number of outstanding shares.
   • Next, you subtract the total capital invested in the company, which includes both equity and debt.
   • The resulting value represents the market value added by the company.

2. Economic Value Added (EVA):

   • EVA is a measure of the company's profitability that takes into account the cost of capital.
   • To calculate EVA, you start by determining the company's net operating profit after tax (NOPAT), which is the operating profit minus taxes.
   • Next, you calculate the company's capital charge, which is the cost of capital multiplied by the total capital invested in the company.
   • Finally, you subtract the capital charge from the NOPAT to obtain the EVA.

In summary, MVA focuses on the market value created by the company, while EVA measures the company's profitability after considering the cost of capital. Both measures provide valuable insights into a company's financial performance and value creation.