Showing posts with label total market value of stock. Show all posts
Showing posts with label total market value of stock. Show all posts

Friday 6 September 2019

Value Added: Market Value Added and Economic Value Added


VALUE ADDED
  • MARKET VALUE ADDED
  • ECONOMIC VALUE ADDED




MARKET VALUE ADDED (MVA)

Market value added (MVA) 

= Current market value or capitalisation (to which debt may be added) – Total shareholders’ equity  

Example:

Capitalisation of a company is $100
Shareholders’ equity in balance sheet is $50
For every $1 of shareholders’ equity, the company has added $1.



ECONOMIC VALUE ADDED (EVA)

Companies should be expected to produce not only an accounting profit but also one that more than covers their cost of capital.

It is argued that EVA is better than earnings per share or price/earnings ratios as these do not take account of the real cost of capital.

Example:

After the charge of $10 ($100 x 10%) representing the estimated cost of capital, the company shows an EVA of $30 for the period.

After tax profit $40
Capital Employed $100
Cost of Capital 10%

After tax profit $40
Cost of Capital $10
ECONOMIC VALUE ADDED $30

A positive EVA indicates that a company is providing investors with added value.

A company with a consistent EVA should have an increasing MVA; it will be generating a rate of return above the cost of capital so the share price should rise.


Examples:

These three companies are all generating a positive return on capital employed.

Company A
After-tax profit $50
Capital employed $200
Cost of capital (10%) $20
ROCE (%)  25
EVA ($)  $30

Company B
After-tax profit $60
Capital employed $400
Cost of capital (10%) $40
ROCE (%)  15
EVA ($)  $20

Company C
After-tax profit $50
Capital employed $600
Cost of capital (10%) $60
ROCE (%)  8
EVA ($)  -10

Although company C produces a positive 8% return on capital employed, it is actually destroying shareholder value with a negative $10 EVA.

In practice, the calculation of EVA requires several adjustments – to allow for the treatment of R&D, goodwill, and brand values, leases and depreciation – to be made to the after-tax profit figure.

It is claimed that EVA, as a single monetary figure, is better at concentrating management attention on the “real” results of running the business than are standard performance ratios such as ROTA.

EVA is often used as a basis for managers’ performance-related incentives.

Saturday 29 April 2017

Primary aim of management is to increase the book value and the market value of the company.

The primary aim of management is to increase

  • the book value and 
  • market value of the company.



Book Value

Book value (shareholders' equity on the company's balance sheet) is calculated as total assets less total liabilities.

It reflects the historical operating and financing decisions made by the company.

Management can directly influence book value (e.g., by retaining net income).


Market Value

However, management can only indirectly influence a company's market value.

Market value of a company is primarily determined by investors' expectations about the about, timing and uncertainty of the company's future cash flows

A company may increase its book value by retaining net income, but it will only have a positive effect on the company's market value if investors expect the company to invest its retained earnings in profitable growth opportunities.

If investors believe that the company has a significant number of cash flow generating investment opportunities coming through, the market value of the company's equity will exceed its book value.



Price to book ratio (market to book ratio)

A useful ratio to evaluate investor's expectations about a company is the price to book ratio.

If a company has a price to book ratio that is greater than industry average, it suggests that investors believe that the company has more significant future growth opportunities than its industry peers.

It may not be appropriate to compare price to book ratios of companies in different industries because the ratio also reflects investors' growth outlook for the industry itself.


Accounting Return on Equity

An important measure used by investors to evaluate the effectiveness of management in increasing the company's book value is accounting return on equity.




Saturday 21 February 2009

Warren Buffett Metric Signals It's "Time to Buy" Stocks

Wednesday, 4 Feb 2009
Fortune's Loomis: Warren Buffett Metric Signals It's "Time to Buy" Stocks


Posted By: Alex Crippen
Topics:Investment Strategy Economy (U.S.) Stock Market Warren Buffett
Companies:Berkshire Hathaway Inc.


Fortune Magazine's Carol Loomis, a journalist with especially strong ties to Warren Buffett, writes that a metric favored by the Omaha billionaire is now signaling it's time to buy stocks.
In today's Fortune Investor Daily on the magazine's web site, Loomis and Doris Burke point to an 85-year chart showing the the total market value of U.S. stocks as a percent of Gross National Product, a measure of economic output.
The idea is "there should be a rational relationship" between the two measures.
In a 2001 Fortune Magazine essay written by Buffett with Loomis, he says if the ratio "falls to the 70% to 80% area, buying stocks is likely to work very well for you." When it is substantially higher, "you're playing with fire." (The essay goes into extensive detail on his reasoning.)
As of late January, according to Fortune's chart, the metric had dropped to 75 percent, after hitting a peak of 190 percent in March of 2000.
She notes that last October, Buffett wrote in the New York Times that he was personally buying U.S. stocks and would continue to do so if prices kept falling, which they have.
Anything Loomis writes about Buffett gets extra attention, due to her closeness to him over the years. She helps write his annual letters to Berkshire Hathaway shareholders and has worked with Buffett on several Fortune articles, including his decision to give away the bulk of his personal wealth in the future.
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Current Berkshire stock prices:

Class A: [US;BRK.A 77000.0 -1600.00 (-2.04%) ]

Class B: [US;BRK.B 2387.0 -129.50 (-5.15%) ]



For more Buffett Watch updates follow alexcrippen on Twitter.

http://www.cnbc.com/id/29016198/