Formula of Cash Value Added
Sales
-
Costs
---------------------------------------------------------
Operating Surplus
+- Working
Capital Movement
-
Non-strategic Investments
---------------------------------------------------------
Operating Cash Flow
-
Operating Cash-Flow Demand
---------------------------------------------------------
Cash Value Added - CVA
|
The Cash Value Added (CVA)
model includes
only cash items, i.e. Earnings Before Depreciation Interest and Tax
(EBDIT, adjusted for non cash charges), working capital movement and
non-strategic investments. The sum of those three items is the Operating
Cash Flow (OCF). The OCF is compared with a cash flow requirement, "the
Operating Cash Flow Demand" (OCFD). This OCFD represents the cash flow
needed to meet the investor's financial requirements on the company's
strategic investments, i.e. the capital cost.
Instead of measuring the
investor's opportunity cost of capital in percentage terms the CVA model
uses the investor's opportunity cost of capital in cash terms. The
difference between the OCF and the OCFD is the "Cash Value Added" - CVA.
The CVA for a period is a good estimate of the cash flow generated above
or below the investor's requirement for that period. This analysis can be
done at each level of the company and the CVA for the company is the
aggregate CVA of its Strategic investments.
Unlike Market-based measures, such as
MVA, Cash Value Added (CVA) can be calculated at divisional (Strategic Business Unit) level.
Unlike Stock measures,
CVA is a flow and
can be used for performance evaluation over time.
Unlike accounting profit, such as
EBIT,
Net Income and EPS, Cash Value Added (CVA) is Economic and is based on the idea that a
business must cover both the operating costs AND the capital costs.
Book: Andrew Black - Questions Of Value: Master The Latest Developments In
Value-based Management, Investment & Regulation -
Compare:
EVA |
CFROI |
Economic Margin
| Cash Flow from
Operations |
Dividend Payout Ratio
More valuation methodologies
|
Category
Financial Value
Residual Income
Cash Flow
Economic Profit
Books
Young, O'Byrne, EVA and VBM
Rappaport, Creating Shareholder Value...
Drucker, Managing for Results
Copeland, Valuation: Measuring and Managing the
Value of Companies
Knight, VBM. Developing a systematic approach..
Martin, VBM. The Corporate Response to the
Shareholder Revolution
Clark, The Value Mandate: Maximizing Shareholder
Value...
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