What Does Cash Value Added Mean?
Cash value added (CVA) is a measure of a company's ability to generate cash flow in excess of investors' required cash flow return on investments by the company. Developed by the Boston Consulting Group, CVA is considered the equivalent of Economic Value Added (EVA), but on the cash flow side. Both CVA and EVA are sometimes referred to as residual income.
Understanding Cash Value Added (CVA)
According to the Boston Consulting Group, there are two CVA calculation methods: direct and indirect.
CVA = gross cash flow - economic depreciation - capital charge
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 on the EVA theme originally conceived by Stern Stewart & Co., a consulting firm. EVA basically measures earnings that exceed the cost of capital. A company's weighted average cost of capital is subtracted from the return on investment (ROI) and multiplied by the amount of invested capital to arrive at the EVA figure. The difference between CVA and EVA is that CVA focuses on the cash flow aspect of the firm. The amount of cash value added is cash flow that surpasses the CFROI required by investors.