What is Shareholder Value Added (SVA)?
Shareholder value added (SVA) represents a company's worth to shareholders in the absence of liabilities and capital costs.
How Does Shareholder Value Added (SVA) Work?
Shareholder value added (SVA) is expressed as a company's capital costs from stock and bond issues subtracted from its net operating profit after tax (NOPAT).
SVA = NOPAT - Cost of Capital
For instance, if a company's NOPAT is $200,000 and its capital costs are $50,000, its SVA would be $150,000 ($200,000 - $50,000 = $150,000).
Dividends augment SVA while additional issuances of stock lower SVA.
Why Does Shareholder Value Added (SVA) Matter?
SVA is a metric which reflects a company's performance in a way that is meaningful to shareholders. At its most theoretical level, it implies that the primary goal of any company should be to increase the returns to shareholders, not necessarily to create value for the company as a whole. Those seeking ever-higher shareholder value added believe that management should make decisions for the company that caters to shareholder interests first and foremost.
SVA was very popular in the 1980's, but has since lost some clout.
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