Cash Value Added (CVA)

What Is Cash Value Added (CVA)?

Cash value added (CVA) is a measure of a company's ability to create cash flow far in excess of the required return to its investors. Generally talking, a high CVA demonstrates a company's ability to create liquid profits starting with one financial period then onto the next.

Cash value added is a fairly esoteric measurement developed by the BCG, the management counseling firm formerly named firm Boston Consulting Group. It tends to be utilized as an alternative to economic value added (EVA) or earnings before interest, taxes, depreciation, and amortization (EBITDA).

How Cash Value Added (CVA) Works

The cash value added measurement is one method for estimating the real profitability of a business, past what is required to pay the bills and fulfill the investors.

The Boston Consulting Group planned the accompanying 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

Where:

• 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 shows that a company is profitable, while a value below 1.0 proposes returning a profit is fizzling.

Cash Value Added versus Economic Value Added

Cash value added is a variation of the economic value added (EVA) metric contrived by counseling firm Stern Value Management, likewise a management counseling firm. It measures a company's whole value by calculating in assets, for example, the appreciation of land the company claims and the value the market puts on the company's brand name.

Basically, cash value added centers stringently around a company's cash flow, while economic value added centers around a company's all encompassing value. Both are ways of evaluating the wealth that a company makes in return for the capital invested in it.

For both CVA and EVA, a positive number demonstrates a company is profitable while a negative number shows it isn't.

Cash Value Added versus EBITDA

Cash value added measures a business' profitability by taking the EBITDA (earnings before interest, taxes, depreciation, and amortization) created by the business, less tax, less its required return.

While EBITDA is a well known measure of investment value, EVA offers a more comprehensive approach and measures a firm's true and whole economic profit

EVA is really the specific inverse of EBITDA, since it is measured after taxes, in the wake of setting to the side depreciation and amortization, and subsequent to guaranteeing all investors receive a return on their capital. EVA offers an image of the true primary concern profit of a business.

Highlights

• Cash value added (CVA) is one method for estimating a company's real profitability.
• It computes the amount passed on over once the required return to investors is met.
• Cash value added, economic value added, and EBITDA are ways of estimating the strength of a company's business performance.