What it means
Investors supply money to a company in two ways: they buy shares and they lend through debt. The total amount supplied, including retained profits, is called invested capital.
If the market now values the business at more than that figure, the managers have turned the funds into something worth more. The calculation compares the total market value of the company, which is the market value of its shares plus its debt, with the capital invested.
The result is a single dollar figure that shows the wealth added or lost. It reflects the market's view of the company's future prospects, not just its past results.
MVA is closely linked to economic value added, or EVA, which measures a company's profit after charging it for the cost of all capital used. In theory, MVA equals the present value of all the EVA the company is expected to earn in the future.
That makes EVA a yearly measure of performance and MVA the market's running total. The measure has limits.
It depends on share prices, which move with the mood of the market, so a rising market can lift MVA even when management has done little. It also favours large companies, since bigger firms have bigger dollar figures, so it is less useful for comparing firms of different sizes without scaling.
Note that the same letters are also used for other terms, including market value adjustment, a feature in some annuity contracts that adjusts the payout if a customer withdraws early when interest rates have changed. Always check the context, because the two ideas are unrelated.
Managers use the measure to focus attention on creating value rather than just growing revenue. A company that expands by spending capital on projects earning below its cost of capital will lower its MVA, however big it becomes.
For this reason, some firms link bonuses to MVA or to the EVA that underlies it.
In practice
Real-world examples.
Example
A board reviews its performance and finds that the company is worth $800,000,000 in the market against $650,000,000 of invested capital. The MVA of $150,000,000 shows that management has created value for investors, and the board uses it in setting executive bonuses. They also compare the figure with the average of their closest competitors to see how they rank.
Example
An analyst comparing two retailers finds that one has a positive MVA and the other a negative one. She investigates and learns that the second company has spent heavily on stores that are earning less than its cost of capital. Her report recommends buying the first company's shares and avoiding the second until its returns improve.
Example
A consultant advising a company on a large acquisition estimates that the deal will reduce MVA if the target is overpaid. The board uses the estimate to negotiate a lower price. The estimate becomes a central part of the board's negotiating brief.
Formula
Calculation
MVA = Market value of the company - Invested capital
Market value of the company = Market value of equity + Market value of debt
Suppose a company has 10,000,000 shares trading at $24, so the market value of equity = 10,000,000 x 24 = $240,000,000. The market value of its debt is $110,000,000, so the total market value = 240,000,000 + 110,000,000 = $350,000,000. If investors have supplied $300,000,000 in capital, MVA = 350,000,000 - 300,000,000 = $50,000,000, which means the company has created $50,000,000 of wealth.Case study
Seen in the real world.
Orion Beverages is an illustrative, fictional drinks company with invested capital of $500,000,000. Its market value, made up of $520,000,000 of equity and $130,000,000 of debt, is $650,000,000.
Its MVA is 650,000,000 - 500,000,000 = $150,000,000. The following year, the company spends $100,000,000 on a new brand that the market doubts, and the market value rises by only $60,000,000.
Invested capital is now $600,000,000 and market value is $710,000,000, so MVA falls to $110,000,000. The illustrative lesson is that MVA can fall even when the company grows, if new investment does not earn more than its cost.
Watch out
Common mistakes.
- Using the book value of debt and equity when the market value of each is required.
- Assuming a high MVA always means good management, when a rising market can do much of the work.
- Confusing MVA with market value adjustment, which is an unrelated annuity feature.
Questions
People also ask.
What is a positive MVA?
It means the market values the business at more than the capital invested, so wealth has been created.
How does MVA relate to EVA?
MVA is the present value of the EVA the company is expected to produce in future years.
Can MVA be negative?
Yes, a negative figure means the company is worth less than the capital put into it.
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