Wealth Added Index (WAI)

What Does Wealth Added Index Mean?

Wealth Added Index (WAI) is a measurement planned by Stern Value Managament, a counseling firm, that endeavors to measure value made (or obliterated) for shareholders by a company. As per this calculation method, wealth is made provided that the returns of a company, comprehensive of share price gains and dividends, surpass its cost of equity.

Understanding Wealth Added Index (WAI)

The calculated underpinning of the Wealth Added Index is that the cost of equity for a company ought to be greater than the return available on risk-free securities, for example, government bonds on the grounds that a company is riskier (the greater the risk an investor expects, the greater the return required). In the event that a company's returns don't surpass its cost of equity, then shareholders ought to invest their money somewhere else. All in all, as per the WAI, on the off chance that the return is not exactly the cost of equity, the company is really obliterating shareholder value; in the event that the return surpasses the cost of equity, the company is adding wealth for its shareholders.

WAI is like Economic Value Added (EVA), another Stern Value Management measure, in that the cost of capital is compared to returns. Traditional accounting return metrics like Return on Equity (ROE) and Return on Assets (ROA) don't think about the opposite side — the cost of capital to accomplish these returns over a certain period. A company can show a high ROE, for instance, yet on the off chance that the cost of capital to accomplish that ROE was even greater, the value was obliterated by the company.

However, there are two key differences among WAI and EVA. In the first place, and generally important, EVA is in reverse looking, computing just outcomes that have previously unfolded. WAI, paradoxically, considers both past share price performance and prospective performance. Since equity value of a company is the current value of all future cash flows, the current share price of a company's stock will mirror the future prospect of value creation, or wealth added. Second, EVA is limited in giving cross-border examinations since it depends on accounting methodologies inside individual countries. Thusly, for example, EVA of a utility company in the U.S. won't be straightforwardly comparable to the EVA of a utility company in Spain in light of the fact that different accounting standards are utilized to determine reported profits. With an emphasis on the movement of the share price and dividends, promptly available for calculation anyplace, WAI can defeat this limitation.