Introduction to this document

Economic value added calculator

If your business has generated growth for the year, even beating budget or last year’s total, your fellow managers may be feeling very satisfied. But does this mean that the company has added value for its shareholders?

Start with profit

From the shareholders’ perspective, profits are only part of working out if the company has created value for them. Remember that the business is also using capital that they have put (or left) in the business, so that needs to be taken into account too. Use our Economic Value Added Calculator to work out by how much your company’s shareholder value has increased.

Your starting point is Profit before tax and dividends” (from your financial statements) to which you need to make adjustments for interest paid/received and remove any dividends the shareholders have been paid out of that profit. The latter is because they have already taken that “value added” out of the company.

Cost of capital

Into the economic value added calculator you’ll need to input your business’s overall cost of capital, or Weighted Average Cost of Capital (WACC), to arrive at a figure to deduct from profits. This is the return that was already expected by shareholders, i.e. this is value but not “added” value.

If the business profits match the cost of the capital used, no extra value will have been created for the shareholders, despite the company being profitable.