|The Key EVA MVA Charts||Chart Legend|
The firm's overall market value, net of excess cash, is plotted as the gray
bar, and the capital invested in its net business assets, also net of excess
cash, is the blue bar.
It’s the spread between the two, or MVA, that counts. If the spread is positive, the firm converted less valuable inputs into more valuable outputs, and it added to the owner's wealth -- or else it has destroyed it.
Observe the blue bar. How aggressive was the investment in business assets -- in working capital, plant and equipment, investments, and intangible assets -- and did management invest the capital at the right times?
A major acquisition will appear as a step jump in capital. In such cases, did the added value cover the purchase price, or was owner wealth eroded?
The firm's MVA is plotted as the blue bar on the left-hand scale. It measures
the owners’ wealth, the firm’s franchise value and the corporate aggregate NPV.
The firm's EVA profit net of the full cost of capital, and after fixing accounting distortions, is the red line plotted on the right hand scale.
Look for a link. When EVA goes sideways or southward, MVA tends to follow in suit, and regardless of whether other measures, like EPS or EBITDA, are growing. It generally takes a rising trend in EVA to lift MVA and generate an outstanding TSR. With cyclical stocks, MVA and EVA tend to move in tandem, albeit with a lag.
For this reason, Fortune magazine dubbed EVA "the real key to creating wealth."
The chart plots the two main EVA drivers -- sales, and the EVA/Sales Margin on the
Look first to compare the curent EVA Margin with the high points and low points over time. Is there discernable trend, for better or worse?
Next, is the EVA Margin positive, or negative, or generally close to zero (in a band of +/- 1-2%)? To create value, the Margin will need to be at least 2%. Less than that, and sales growth doesnt really count.
Note cyclicality. Does the firm's EVA Margin tend to nosedive when sales are off, and strongly rebound with a sales recovery? If so, that is a sign of fixed cost intensity, and, perhaps, a management team that is unable to temper capital spending in good times and to anticipate or swiftly respond to downturns.