Economic and market value added: performance measurement in finance
- Graziano Stefanelli
- Aug 17
- 4 min read
Economic Value Added (EVA) and Market Value Added (MVA) are advanced performance metrics designed to assess a company’s ability to create value for its shareholders beyond conventional accounting profits.
They go beyond traditional net income measures by focusing on whether the business generates returns in excess of the cost of capital and whether it increases the total wealth of its investors over time.
While EVA measures value creation within a specific period, MVA captures the cumulative effect of management’s decisions since the company’s inception or a given starting point. Both metrics are widely used in corporate finance, investment analysis, and executive compensation plans to align decision-making with shareholder interests.
Economic Value Added measures economic profit by subtracting the cost of capital from net operating profit after taxes.
EVA is calculated as:
EVA = NOPAT − (Invested Capital × WACC)
Where:
NOPAT = Net Operating Profit After Taxes — a measure of operating performance free from financing effects.
Invested Capital = Total capital employed in the business, including equity and debt.
WACC = Weighted Average Cost of Capital, representing the blended cost of debt and equity financing.
The essence of EVA is to determine whether the company earns more than its investors require for taking on risk.A positive EVA indicates that the company is creating value, while a negative EVA means it is destroying value relative to the capital invested.
Example:
If NOPAT is $120M, invested capital is $800M, and WACC is 10%, the capital charge is $80M ($800M × 10%).EVA = $120M − $80M = $40M → value creation.
Market Value Added measures the total wealth created for shareholders over the company’s lifetime.
MVA is defined as the difference between the company’s market value (enterprise value) and the capital contributed by investors.
MVA = Market Value of Equity and Debt − Total Capital Invested
Where:
Market value of equity is the current share price multiplied by the number of outstanding shares.
Market value of debt is the present value of interest-bearing liabilities, often approximated by book value for non-traded debt.
Total capital invested includes equity capital contributions and all forms of debt financing.
A positive MVA signals that the market believes the company has created value in excess of the resources invested; a negative MVA suggests the opposite.Unlike EVA, MVA reflects cumulative performance and is heavily influenced by market expectations of future performance.
EVA and MVA complement each other in assessing value creation.
EVA provides a period-specific measure of value creation, making it useful for annual performance evaluation and incentive compensation.
MVA offers a long-term, market-based perspective, serving as a check on whether the cumulative effect of management’s actions has been favorable to investors.
In practice, companies that consistently post positive EVA tend to see their MVA rise over time, as markets reward the delivery of returns above the cost of capital.
Adjustments to accounting data are critical for accurate EVA and MVA calculations.
Standard financial statements often require adjustments to remove distortions from accounting conventions:
Capitalizing R&D expenditures rather than expensing them immediately.
Eliminating one-time gains or losses.
Adjusting for operating leases to treat them as capital investments.
Excluding non-operating assets from invested capital calculations.
Without such adjustments, EVA may understate or overstate true economic performance, and MVA may misrepresent market-implied value creation.
Applications in corporate decision-making extend beyond performance measurement.
Capital budgeting: EVA can serve as a hurdle metric, ensuring that new investments are projected to earn more than the cost of capital.
Incentive compensation: Linking executive bonuses to EVA encourages managers to focus on long-term value creation rather than short-term earnings manipulation.
Investor relations: Communicating MVA trends helps articulate the company’s track record in building shareholder wealth.
Strategic planning: Comparing EVA across business units can guide resource allocation toward the most value-accretive activities.
Limitations and challenges exist despite their conceptual strength.
EVA’s reliance on WACC means it is sensitive to assumptions about cost of equity, market risk premium, and capital structure.
MVA can fluctuate with market sentiment, interest rates, and macroeconomic conditions, sometimes independently of operational performance.
Extensive adjustments to accounting figures make both measures more complex and potentially less transparent to external stakeholders.
Best practices for using EVA and MVA emphasize integration with corporate strategy and communication.
Companies should calculate and monitor EVA and MVA consistently over time, ensuring that assumptions about WACC and invested capital are transparent and periodically updated.
They should incorporate these metrics into management dashboards, performance scorecards, and investor reporting to reinforce a culture focused on value creation.
When combined with other performance indicators, EVA and MVA provide a balanced, comprehensive view of a company’s ability to generate economic returns and increase shareholder wealth — the ultimate goals of corporate finance.
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