Shareholder value added (SVA) is a performance metric that results from subtracting a corporation's cost of capital from its net operating profit after tax. Some value investors use SVA as a tool to judge the corporation's profitability and management efficacy. This line of thinking runs congruent with value-based management, which assumes that the foremost consideration of a corporation should be to maximize economic value for its shareholders.
The popularity of SVA reached a peak during the 1980s as corporate managers and boards of directors came under scrutiny for focusing on personal or company gains rather than focusing on shareholders. SVA is no longer held in such high regard by the investment community.
Value investors who focus on SVA are more concerned with generating short-term returns above market average than with longer-term returns. This trade-off is implicit in the SVA model, which punishes companies for incurring capital costs in an attempt to expand business operations. Critics counter that these value investors are driving companies towards making shortsighted decisions rather than focusing on satisfying their customers.
In a sense, investors who focus on SVA are often actually looking for cash value added (CVA). Companies that generate a lot of cash through their operations can pay higher dividends or show greater short-term profits. This is only a proximate effect of actual productivity or wealth creation, however. Real investments often require intense capital expenditures and short-term losses.
Stockholders always want their corporations to maximize returns, pay dividends and show profits. Value investors can risk becoming shortsighted by focusing only on SVA and not considering the long-term implications of too little reinvestment.