What is Shareholder Value Added - SVA
Shareholder value added (SVA) is a measure of the operating profits that a company has produced in excess of its funding costs, or cost of capital. The basic calculation is net operating profit after tax (NOPAT) minus the cost of capital, based on the company's weighted average cost of capital:
BREAKING DOWN Shareholder Value Added - SVA
Shareholder value is created when a company's profits exceed its costs. But there is more than one way to calculate this. Net profit is a rough measure of shareholder value-added, but it does not take into account funding costs, or the cost of capital. Shareholder value added (SVA) shows the income a company has earned in excess of its funding costs.
Shareholder value added has a number of advantages. The SVA formula uses NOPAT, which is based on operating profits and excludes the tax savings that result from the use of debt. This removes the effect of financing decisions on profits and allows for an apples-to-apples comparison of companies regardless of their financing method.
NOPAT also excludes extraordinary items and is, therefore, a more precise measure than the net profit of a company's ability to generate profits from its normal operations. Extraordinary items include restructuring costs and other one-time expenses that may temporarily affect a company's profits.
One disadvantage of SVA is that it is difficult to calculate for privately held companies. SVA requires calculating the cost of capital, including the cost of equity. This is difficult for companies that are privately held.