Value Creation Measures
Uploaded by
ScribdTranslationsValue Creation Measures
Uploaded by
ScribdTranslationsResearch conducted by: Saad Benjar
Module: Financial Policy and Value Management
Value creation measures
Creating value does not have the simple and unique goal of satisfying the
shareholders. Creating value is essential to ensure survival of
the company and to finance its growth. Moreover, a company that creates
Value for its shareholders attracts more investors.
Value creation measurement indicators have as a denominator
common idea that the company creates value if the profitability of
committed capital exceeds its cost. On the other hand, the communication related to the
Shareholder value has been facilitated by the proliferation of measures.
developed by Anglo-Saxon consulting firms. Very widespread
today, these measures allow for the estimation of the economic performance of
management or a production unit in relation to a goal and serve
also as a reference for compensation systems.
3.1. The management indicators
The common principle of economic performance measures is to relate
the wealth generated by the company compared to the amount of capital invested in it
to achieve. The creation of value arises from a company's ability to generate
a compensation higher than the cost of the financial resources used.
. ECONOMIC VALUE ADDED (EVA) OR ECONOMIC ADDED VALUE
Economic Value Added (EVA) or economic value added is a measure of
company performance. It is calculated by subtracting from the result
net operating income after taxes (RE(1 –TIS)) the cost of invested capital (IC)
multiplied by the adjusted weighted average cost of capital (WACC):
RE(1−TIS)−CMPC × CI
By reasoning in terms of profitability, the EVA is rewritten as follows:
(ROIC−CMPC)×CI
With ROIC (Return On Invested Capital), the rate of return on capital
invests.
The advantage of EVA compared to traditional performance measures,
like earnings per share, return on equity or even
the return on assets is the consideration of risk. The EVA assesses the
performance based on the return on invested capital (ROIC) while
takes into account the cost and thus the risk (WACC) of the different modes of
financing (CI). EVA is a management indicator that generalizes to all the
operational levels by raising awareness among the various actors on both
results objectives but also on the costs of the financial resources allocated to
their disposition.
When the EVA is positive, the company generates excess profitability by
report on the cost of the funds made available. The company is a creator of
wealth for shareholders. When EVA is negative, the performance of
investments or company projects are insufficient to cover the
financing costs, it is therefore value destructive.
We will detail in the following subsections the components of the calculation of
the EVA:
The profitability of capital.
The amount of invested capital.
The cost of invested capital.
3.2. The stock market indicators
The most popular models for evaluating stock market value creation
are TSR (Total Shareholder Return), MVA (Market Value Added), and M/B
ratio (Market-to-Book).
Market value added (MVA) or market added value
The Market Value Added (MVA) provides information about the valuation by the
stock market resources provided by shareholders and creditors
in relation to their value recorded in accounting. This value creation
market capitalization is equal to the sum of the capitalization of shares and the value of
debt market decreased by the book value of invested capital:
MVA=V B (CP+D)−VC (CP+D)
with VB(CP+D), the market value of invested capital, and VC(CP+D), the value
accounting for invested capital.
The MVA is the discounted sum, at the cost of capital, of future EVAs.
anticipated. Thus, a positive MVA means that the market anticipates a
creation of value higher than the cost of capital. Two interpretations are
so possible:
The MVA can be represented as the net present value (NPV) of all
the company's investments
laMVA also corresponds to the difference between the market value and the
book value of invested capital.
A positive MVA indicates that the market is optimistic and is willing to pay.
price currently quoted on this one because it anticipates that the company will create some
wealth beyond the cost of capital. In contrast, a negative MVA reflects a
lack of market confidence in management that anticipates a
insufficient profitability in view of the cost of the invested capital.
3.3 The Market-to-Book Ratio (MV/BV)
The Market-to-Book ratio (MV/BV, like the MVA indicator, compares the price
market (MV) to the book value of shares (BV). If the ratio is greater than
1, the market is confident in the company's ability to create value
for its shareholders. On the contrary, a ratio of less than 1 indicates a
destruction of value.
The Market-to-Book can be broken down as follows:
M/B = MV/BV
where EPS is earnings per share, and ROE is Return On Equity or profitability
financial. The PER or capitalization multiple is the ratio of the stock price
on earnings per share.
If the ratio is greater (less) than 1, the market anticipates a creation
(destruction) devalued by the company.