Definition: Market value added (MVA) is a financial calculation that measures the capital that investors have contributed to a company in excess of the market value of the company. In other words, it measures if the firm has created positive value or destroyed value from its investors.
What Does Market Value Added Mean?
What is the definition of market value added? MVA is a vital concept that investors use to gauge how well the company has been using its capital. The state of MVA, either positive or negative, can reinforce or undermine the company’s current direction. If it is negative, the firm might decide to change directions in favor of a more value-oriented approach. Also, a negative MVA signals to investors that the company is not using its capital effectively or efficiently. Thus, it’s not a good investment.
The MVA formula is calculated by subtracting the invested capital from the firm FMV.
Let’s look at an example.
ABC is a public brewing company that manufactures and distributes various kinds of beer and spirits. However, in order to begin production, the company needs to be able to build production facilities, distribution channels, and purchase materials. One way the company can finance these investments is by gathering capital from shareholders and outside parties. Thus, ABC seeks to raise $20,000,000 in capital from shareholders in order to begin production. The company seeks to purchase a $5,000,000 plant, $2,000,000 in vehicles to distribute the product, and $13,000,000 to pay for raw materials and employee salaries in the future. They begin creating the alcohol, and it is soon shipped out of the door.
After the first two years of production, ABC wants to raise another $30,000,000 for expansion. However, those same shareholders are skeptical of the anemic growth the company has undergone in the past two years, and wants to calculate how well their money has been allocated. Since the company is public, investors can see that the company’s FMV is $15,000,000. However, since the investors invested $20,000,000, this means that the brewing company’s Market-Value-Added is -$5,000,000.
The investors see that ABC has destroyed company value over the past two years and reason that this next investment will probably end the same. They decide not to invest, and ABC cannot expand.
Define Market Value Added: MVA means the difference between the FMV of a company and the amount investors contributed to it.