What Does Cash Value Added Mean?
Cash Value Added (CVA) is a somewhat esoteric metric developed by the research firm Boston Consulting Group, which measures a company's ability to generate cash flow above and beyond its cost of capital. Generally speaking, a high CVA signals a company's ability to produce liquid profits from one financial period to another.
How Cash Value Added (CVA) Works
The Boston Consulting Group designed the following two CVA calculation methods:
- Direct: CVA = gross cash flow - economic depreciation - capital charge
- Indirect: CVA = (CFROI - cost of capital) x gross investment
- CFROI is cash flow return on investment, or [(gross cash flow - economic depreciation) / gross investment]
- Economic depreciation is [WACC / (1+WACC)^n -1]
- Gross cash flow is adjusted profit + interest expense + depreciation
- Capital charge is cost of capital x gross investment
- Gross investment is net current assets + historical initial cost
Cash Value Added vs. Economic Value Added
CVA is a variation of the Economic Value Added (EVA) metric devised by consulting firm Stern Stewart & Co, which measures a company's entire value, by factoring in assets such as the appreciation of land a company owns, as well as the value the market places on a company's brand name. Simply put: CVA focuses strictly on a firm's cash flow, while the EVA focuses on a company's holistic value.