What Is Cash Value Added (CVA)?
Cash value added (CVA) is a measure of a company’s ability to generate cash flow above and beyond the required return to its investors. Generally speaking, a high CVA indicates a company’s ability to produce liquid profits from one financial period to another.
Cash value added is a somewhat esoteric metric developed by the BCG, the management consulting firm formerly named firm Boston Consulting Group. It can be used as an alternative to economic value added (EVA) or earnings before interest, taxes, depreciation, and amortization (EBITDA).
- Cash value added (CVA) is one way to measure a company’s real profitability.
- It calculates the amount left over once the required return to investors is met.
- Cash value added, economic value added, and EBITDA are all ways to measure the strength of a company’s business performance.
How Cash Value Added (CVA) Works
The cash value added metric is one way to measure the real profitability of a business, beyond what is required to pay the bills and satisfy the investors.
The Boston Consulting Group designed the following two calculation methods for cash value added:
- Direct: CVA = gross cash flow – economic depreciation – capital charge
- Indirect: CVA = (CFROI – cost of capital) x gross investment
- CFROI is cash flow return on investment, or [(gross cash flow – economic depreciation) / gross investment]
- Economic depreciation is [WACC / (1+WACC)^n -1]
- Gross cash flow is adjusted profit + interest expense + depreciation
- The capital charge is the cost of capital x gross investment
- Gross investment is net current assets + historical initial cost
A value of more than 1.0 indicates that a company is profitable, while a value below 1.0 suggests it is failing to return a profit.
Cash Value Added vs. Economic Value Added
Cash value added is a variation of the economic value added (EVA) metric devised by consulting firm Stern Value Management, also a management consulting firm. It measures a company’s entire value by factoring in assets such as the appreciation of land the company owns and the value the market places on the company’s brand name.
Simply put, cash value added focuses strictly on a company’s cash flow, while economic value added focuses on a company’s holistic value. Both are ways to evaluate the wealth that a company creates in return for the capital invested in it.
For both CVA and EVA, a positive number indicates a company is profitable while a negative number indicates it is not.
Cash Value Added vs. EBITDA
Cash value added measures a business’ profitability by taking the EBITDA (earnings before interest, taxes, depreciation, and amortization) generated by the business, less tax, less its required return.
While EBITDA is a popular measure of investment value, EVA offers a more holistic approach and measures a firm’s true and entire economic profit
EVA is actually the exact opposite of EBITDA, since it is measured after taxes, after setting aside depreciation and amortization, and after ensuring all investors receive a return on their capital. EVA offers a picture of the true bottom-line profit of a business.