Cash Value Added
(CVA)

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Summary

The Cash Value Added (CVA) model includes only cash items, i.e. Earnings Before Depreciation Interest and Tax (EBDIT, adjusted for non cash charges), working capital movement and non-strategic investments. The sum of those three items is the Operating Cash Flow (OCF). The OCF is compared with a cash flow requirement, "the Operating Cash Flow Demand" (OCFD). This OCFD represents the cash flow needed to meet the investor's financial requirements on the company's strategic investments, i.e. the Cost of Capital.


Opportunity cost of capital in cash terms

Instead of measuring the investor's opportunity Cost of Capital in percentage terms, the CVA model uses the investor's opportunity Cost of Capital in cash terms. The difference between the OCF and the OCFD is the "Cash Value Added" - CVA. The CVA for a period is a good estimate of the cash flow generated above or below the investor's requirement for that period. This analysis can be done at each level of the company and the CVA for the company is the aggregate CVA of its Strategic investments.


CVA compared with MVA

Unlike Market-based measurements, such as MVA, Cash Value Added (CVA) can be calculated at divisional (Strategic Business Unit) level.


Unlike Securities measurements, CVA is a flow and can be used for performance evaluation over time.


CVA compared with EBIT

Unlike accounting profit, such as EBIT, Net Income and EPS, Cash Value Added (CVA) is Economic and is based on the idea that a company must cover both the operating costs AND the Cost of Capital.


Formula of Cash Value Added

      Sales

-     Costs

------------------------------------------------------

      Operating Surplus

+-   Working Capital Movement

-     Non-strategic Investments

------------------------------------------------------

      Operating Cash Flow

-     Operating Cash-Flow Demand

------------------------------------------------------

      Cash Value Added - CVA


Book: Andrew Black - Questions Of Value


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🔥 NEW Advantage of Cash Value Added Concept versus Economic Value Added
The cash value added concept is based, as opposed to economic value added, on cash flow figures and therefore offers lit (...)
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Comparing EVA and CVA
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Compare with Cash Value Added:  EVA  |  CFROI  |  Economic Margin  |  Cash Flow from Operations  |  Dividend Payout Ratio


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