Market Value Added (MVA) is a powerful metric that reveals the difference between the market value of a company and the capital contributed by its investors. Essentially, MVA is the market value of combined debt and equity minus all capital claims held against the company. Here’s how it is calculated:
MVA = V - K
Where MVA stands for Market Value Added, V is the market value of the firm, which includes both equity and debt (often referred to as the firm’s [enterprise value]), and K is the total amount of capital invested in the firm by its investors.
MVA aligns strongly with the concept of [Economic Value Added (EVA)], representing the [Net Present Value (NPV)] of a series of EVA values.
Key Takeaways
- Management Effectiveness: High MVA signals that a company’s management is creating more value through actions and investments than the cost of the capital by the shareholders.
- Evaluation Metric: It serves as a metric to evaluate management performance, but this should be done with caution during strong bull markets when rising stock prices can skew the results.
- Long-term Attractiveness: Companies with consistently high MVA are attractive to investors due to their potential for positive returns and indications of robust management.
Understanding Market Value Added (MVA)
Investors often use MVA to gain insights into how a company performs for its shareholders. A high MVA signifies effective management and operational efficiency, showing the company’s ability to increase shareholder value continually. Conversely, a low or negative MVA indicates that the management actions have not justified the capital investment by the shareholders.
MVA Reflects Commitment to Shareholder Value
Companies achieving high MVA are generally more attractive to investors because this metric suggests a higher likelihood of providing positive returns. Furthermore, it is indicative of strong leadership and sound governance. Sustained or growing MVA signals efficient operations and judicious application of capital, catalyzing further investment and, in turn, enhancing MVA.
MVA also must be considered in rebate to cash payouts to shareholders such as dividends and stock buybacks, which MVA doesn’t account for. It may not be a completely reliable indicator during strong bull markets due to overarching stock price trends.
Examples of MVA
Let’s take a closer look at companies that exemplify strong Market Value Added metrics:
Alphabet Inc. (GOOGL) of Google Parent Fame
Alphabet Inc. is among the most valuable global companies, boasting high growth potential. Google’s stock returned an astonishing 1,293% within its first decade of operation. Despite initial market exuberance contributing to its MVA, Alphabet successfully managed to evolve its MVA significantly. In just four years, from 2015-2019, Alphabet’s MVA grew from $354.25 billion to an impressive $1.19 trillion in 2020.
Coca-Cola Company (KO): An Icon of Consistency
On the other end of the spectrum, there’s the established Coca-Cola Company. Renowned for its steady growth, Coca-Cola’s management is applauded for its effectiveness in boosting shareholder value. By the end of 2019, Coca-Cola’s MVA stood at $219.66 billion, up from $158.52 billion in 2017. Over the past five years, Coca-Cola even achieved an average annual dividend increase of 5.3%.
Related Terms: Enterprise Value, Economic Value Added, Net Present Value, Contributed Capital, Dividends, Stock Buybacks.
References
- Stock Analysis on Net. “Alphabet Inc. Market Value Added”.
- Stock Analysis on Net. “Coca-Cola Co. Market Value Added”.
- The Coca-Cola Company. “2019 Form 10-K”, Page 60.
- Dividend Scholar. “Coca-Cola Stock, a 58 Year Dividend Aristocrat”.
