EVA & MVA: Advanced Metrics for Measuring True Value Creation
Short intro: Traditional profit figures don’t always reveal whether a company is creating shareholder wealth. This post explains two powerful measures — Economic Value Added (EVA) and Market Value Added (MVA) — and shows how they give a fuller picture of value creation.
Beyond earnings—how do you measure if your company is building real wealth?
Beyond revenue and profits lies the real measure of success. EVA & MVA capture the essence of long-term wealth creation.
What is Economic Value Added (EVA)?
Definition
EVA measures the residual wealth created after deducting the cost of capital from operating profits. It answers the question: Has the company earned more than its cost of financing?
Formula
EVA = NOPAT - (Capital Employed × WACC)
- NOPAT — Net Operating Profit After Taxes
- Capital Employed — Equity + Interest-bearing Debt
- WACC — Weighted Average Cost of Capital
Why EVA matters
- Aligns management performance with shareholder value creation.
- Discourages investments that do not beat the cost of capital.
- Helps evaluate efficient use of resources across business units.
Example: Company earns ₹120 crores NOPAT, capital employed ₹800 crores, WACC 12% →
Cost of capital = ₹800 × 12% = ₹96 crores
EVA = ₹120 - ₹96 = ₹24 crores (Positive EVA => wealth created)
What is Market Value Added (MVA)?
Definition
MVA is the difference between the market value of the company (equity + debt) and the capital invested by shareholders and lenders. It reflects how the market perceives the company’s ability to create value over time.
Formula
MVA = Market Value of Equity + Debt - Capital Invested
Why MVA matters
- Represents long-term wealth creation as judged by investors.
- Useful for external stakeholders — investors, analysts, rating agencies.
- Captures market expectations and reputation effects beyond accounting.
Example: Market cap ₹5,000 crores, debt ₹1,000 crores, capital invested ₹4,200 crores →
MVA = (₹5,000 + ₹1,000) - ₹4,200 = ₹1,800 crores (Positive MVA => market believes firm created value)
EVA vs. MVA — Key Differences
| Aspect | EVA | MVA |
|---|---|---|
| Focus | Internal performance measure | External market perception |
| Time horizon | Short to medium (annual) | Long-term (cumulative) |
| Basis | Accounting with cost of capital | Market valuation |
| Primary users | Managers, internal decision-makers | Investors, analysts, shareholders |
Why these are considered advanced metrics
Traditional measures such as profit or EPS can be misleading because they ignore the cost of capital and market expectations. EVA and MVA are advanced because they:
- Integrate accounting and market perspectives.
- Directly link corporate actions to shareholder wealth.
- Help avoid value-destroying growth strategies.
Practical applications
- Performance evaluation: Use EVA to evaluate business unit profitability after cost of capital.
- Capital allocation: Prioritize projects with positive EVA.
- Compensation design: Tie bonuses to EVA to align management with shareholders.
- Investor communication: Report MVA trends to demonstrate long-term value creation.
Final thoughts
EVA tells you whether the company is earning above its cost of capital. MVA shows how the market rewards that performance over time. Together they provide a comprehensive, 360° view of value creation — more informative than profit figures alone.
