Market value added (MVA) is the amount of wealth that a company is able to create for its stakeholders since its foundation. In simple terms, it’s the difference between the current market value of the company’s stock and the initial capital that was invested in the company by both bondholders and stockholders.
Market value added, on the other hand, is merely the difference between the current value of the company on the market and the initial contributions made by its investors.
Contrary to what many assume, MVA is not a performance indicator. Instead, it is a metric used to measure wealth. Essentially, it is used to determine exactly how much value the firm has accumulated over time.
If a company has been performing well, it means that it has been retaining earnings. The earnings boost the book value of the company’s stocks, encouraging investors to increase the prices of their shares in anticipation of future earnings. The whole process causes the company’s market value to soar.
MVA = Market Value of Shares – Book Value of Shareholders’ Equity
Advantages of Market Value Added (MVA)
Boosts the survival chances of a company
In the corporate world, nothing is 100% sure. A company could be making billions of profits one minute and declaring bankruptcy the next time. However, for a company to register a high MVA, its likelihood to thrive is certainly high.
A high MVA means the company is generating enough wealth so it will continue to attract investors. It then means that it will continue to expand its operations, earn more profit, and stay ahead of its competitors.
Makes companies more attractive to potential investors
Investors will always prefer companies with higher MVA because it shows the firm’s ability to create wealth for its stockholders. In other words, a high MVA shows that the organization is healthy and succeeding a factor that signals a high probability of generating significant returns later on. So, for investors who are not interested in high-return investments, a firm with a high MVA seems like a safe option.