Market Value Added

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Description: The market value added measurement shows the net difference between a company’s market value and the cost of its invested capital. A negative amount indicates that management has done a poor job of creating value with the base of equity available to it, since investors have reduced the company’s value below the amount of equity invested.

Formula: To calculate market value added, multiply the number of common shares outstanding by their current market price. Then multiply the number of preferred shares outstanding by their market price, and add the result to the total market value for all common stock; then subtract from it the original amount of invested capital. When deriving this calculation, be sure to use only the number of shares outstanding, exclusive of any treasury stock. The formula is as follows:

(Number of Common Shares Outstanding x Share Price) + (Number of Preferred Shares Outstanding x Share Price) – (Book Value of Invested Capital)

Example: The Chief Financial Officer of a company that trades on the NASDAQ is preparing a statement for investors, showing the increase in value that the management team has provided to investors during the past year. This statement will include the market value added measurement. She obtains the following information:

	Prior Year	Current Year
Number of Common Shares Outstanding	3,500,000	4,000,000
Common Stock Price	$5.12	$7.03
Number of Preferred Shares Outstanding	467,000	525,000
Preferred Share Price	$14.00	$14.93
Book Value of Invested Capital	$20,000,000	$24,300,000

She calculates the prior year market value added as follows:

(3,500,000 Common Shares x $5.12 Price) + (467,000 Preferred Shares x $14.00 Price) - $20,000,000 Equity Book Value

($17,920,000 Common Market Value) + ($6,538,000 Preferred Book Value) - $20,000,000 Equity Book Value

= $4,458,000 Market Value Added

Using the same formula, she calculates the market value added for the current year, as follows:

(4,000,000 Common Shares x $7.03 Price) + (525,000 Preferred Shares x $14.93 Price) - $24,300,000 Equity Book Value

($28,120,000 Common Market Value) + ($7,838,250 Preferred Book Value) - $24,300,000 Equity Book Value

= $11,658,250 Market Value Added

The CFO can point out to investors that there is a net gain in market value added of $7.2 million in the past year, which is an increase of 161% over the past year.

Cautions: The market value added calculation is a difficult one to make if a company’s stock is either not publicly held or thinly traded, since it is difficult to obtain a market value for any outstanding shares. Even if shares are publicly held, it is possible that some classes of stock are so restricted, such as special voting stock amongst a few shareholders, that it is impossible to determine the value of these classes. This problem can be reduced by obtaining an outside valuation from an appraiser, or by consistently using any of a number of valuation techniques, such as the present value of cash flows, a multiple of sales, or the fair market value of net assets.

Also, an increase in market value may be due to a general run-up in the entire stock market, rather than any particular actions by the management team to improve company value; in a strong bull or bear market, this issue can comprise the bulk of any changes in the market value added measure. Also, perceived investor changes on an entire industry (such as changes in the price of jet fuel on the airline industry) can cause investors to drive the stock price of an individual company within that industry up or down, despite its having positioned itself to be immune from the changes that are driving investor behavior.