DEFINITION of 'Wealth Added Index - WAI'

Wealth Added Index (WAI) is a metric designed by Stern Stewart & Co, a consulting firm, that attempts to measure value created (or destroyed) for shareholders by a company. According to this calculation method, wealth is created only if the returns of a company, inclusive of share price gains and dividends, exceed its cost of equity.

BREAKING DOWN 'Wealth Added Index - WAI'

The conceptual foundation of the Wealth Added Index is that the cost of equity for a company should be greater than the return available on risk-free securities such as government bonds because a company is riskier. (The greater the risk an investor assumes, the greater the return he or she should require.) If a company's returns do not exceed its cost of equity, then shareholders should invest their money elsewhere. In other words, according to the WAI, if return is less than the cost of equity, the company is actually destroying shareholder value; if the return exceeds the cost of equity, the company is adding wealth for its shareholders. 

WAI is similar to Economic Value Added (EVA), another Stern Stewart measure, in that the cost of capital is compared to returns. Traditional accounting return metrics like Return on Equity (ROE) and Return on Assets (ROA) do not consider the other side - the cost of capital to achieve these returns over a certain period. A company can show a high ROE, for example, but if the cost of capital to achieve that ROE was even greater, then value was destroyed by the company.

But there are two key differences between WAI and EVA. First, and most important, EVA is backward-looking, calculating only results that have already transpired. WAI, by contrast, takes into account both past share price performance and prospective performance. Because equity value of a company is the present value of all future cash flows, the current share price of a company's stock will reflect the future prospect of value creation, or wealth added. Second, EVA is limited in providing cross-border comparisons because it relies on accounting methodologies within individual countries. Therefore, for instance, EVA of a utility company in the U.S. will not be directly comparable to the EVA of a utility company in Spain because different accounting standards are used to derive reported profits. With a focus on the movement of the share price and dividends, readily available for calculation anywhere, WAI is able to overcome this limitation.

  1. Eva Longoria Stock Index

    The Eva Longoria Stock Index is a stock index made up of companies ...
  2. Cost Of Equity

    The cost of equity is the rate of return required on an investment ...
  3. The Wealth Effect

    The wealth effect in behavioral finance suggests that investors ...
  4. Relative Return

    Relative return is the return an asset achieves over a period ...
  5. Stern School Of Business At NYU

    The Stern School of Business at NYU is the business school of ...
  6. Equity Multiplier

    The ratio of a company’s total assets to its stockholders’ equity. ...
Related Articles
  1. Investing

    All About EVA

    Looking for a formula to determine whether a company is creating wealth? Time to learn all about economic value added.
  2. Investing

    Analyzing Wells Fargo's Return on Equity (WFC)

    Examine Wells Fargo & Company's return on equity and how stacks up against its major competitors, along with future projections for the company's ROE.
  3. Small Business

    The financial characteristics of a successful company

    There are many factors that contribute to a profitable business. Find out some of the financial characteristics that create a competitive advantage.
  4. Investing

    Analyzing JetBlue's Return on Equity (JBLU)

    Learn about JetBlue's historical ROE and how it stacks up to similar-sized peers. ROE is a useful metric for investors to understand.
  5. Investing

    A Study On The Wealth Effect And The Economy

    The notion that the wealth effect spurs personal consumption makes sense intuitively. After all, wouldn’t you be more inclined to buy that big-screen TV or SUV if your house or stock portfolio ...
  6. Investing

    Analyzing Apple's Return on Equity (AAPL)

    Learn about Apple's return on equity (ROE) in fiscal 2015, and find out how net profit margin, financial leverage and asset turnover impact ROE relative to its peers.
  7. Managing Wealth

    The Richest and Poorest Countries Per Capita in 2016

    The United States only comes in third for the highest wealth per adult.
  8. Investing

    Understanding Economic Value Added (TM)

    Discover the simplicity of Economic Value Added (TM), also known as economic profit.
  9. Investing

    Analyzing Facebook's Return on Equity (FB)

    Learn about Facebook's return on equity (ROE), and find out how it compares to its peers. Discover how net margin, asset turnover and financial leverage impacted its ROE.
  10. Investing

    Analyzing Procter & Gamble's Return on Equity (ROE) (PG)

    Find out how Procter & Gamble's return on equity (ROE) has varied over time, how the company's ROE compares with its peers and what its ROE is projected to be.
  1. What's the difference between economic value added and market value added?

    Find out how economic value added (EVA) and market value added (MVA) differ as measures of economic profit. Determine how ... Read Answer >>
  2. How to calculate return on equity (ROE)?

    Return on equity (ROE) measures how efficiently a company's executives are generating income from the equity investments ... Read Answer >>
  3. What is the difference between cost of equity and cost of capital?

    Cost of equity is the percentage return demanded by a company's owners; the cost of capital includes the rate of return demanded ... Read Answer >>
  4. How do you calculate shareholder equity?

    Shareholder equity is calculated by subtracting a company's total liabilities from its total assets. It's the amount remaining ... Read Answer >>
  5. What is the average return on equity for a company in the insurance sector?

    Learn about the commonly used metric in valuations, return on equity, and its average value for a typical company in the ... Read Answer >>
  6. How do you calculate a company's equity?

    Company equity, or shareholders' equity, is the net difference between a company's total assets and total liabilities. Read Answer >>
Trading Center