Of the top three companies, GE has the highest MVA and highest EVA. Wal-Mart’s EVA is higher than Microsoft’s, which means that the market is projecting different rates of growth for these companies. The fact that Microsoft has about the same MVA but a much lower EVA than GE means the market believes Microsoft has a greater opportunity to grow. This is partly underscored by its 22 percent return on average capital, which is nearly double that of its two MVA peers.
What does it mean that GE has the highest MVA and EVA? “If the MVA for GE is the same as for the other two companies, that means GE has less prospect for growth compared with the other two,” Stewart explains. In fact, although its EVA has grown somewhat over the past three years, its MVA has eroded by more than 17 times that of Wal-Mart over the three-year period. “[Its MVA score suggests] that GE doesn’t have the same intrinsic growth opportunity.
Wal-Mart has stupendous growth prospects but the lowest return on capital, so it has significant growth at lower margins. Microsoft, on the other hand, is a higher-growth, higher-return company. GE has a low-return, low-growth base, and a modest chance to grow its EVA,” he adds.
Perhaps the most impressive large companies in the Tier-1 ranking are Procter & Gamble and Johnson & Johnson, which show the best three-year improvements in MVA. (Changes in rankings between 1999 and 2002 are shown on the charts beginning on page 62, while three-year averages for EVA and MVA are available at www.cfo.com.) Procter & Gamble leaped from number 32 in 1999 to number 6 in 2002 in terms of MVA. Biopharmaceuticals company Gilead Sciences showed the highest three-year MVA gain among the 25 largest market-cap companies with less than $700 million in revenues, rising to second place from number 174 three years ago.
Technology companies rank high in terms of MVA despite the short life span of many new technology and Internet companies. Six of the 14 top large companies are tech companies; Ebay and Qualcomm fall among the top four midsize (Tier 2) companies, and Linear Technology is the highest company with sales below $700 million (Tier 3). From 1999 to 2002, Ebay, in fact, moved from number 25 to number 2 among companies with sales between $700 million and $7 billion, and now boasts twice the MVA of Amazon.com.
It’s not quite the magic number that will enable a company to understand precisely what it needs to do to maximize shareholder value and increase profitability. But MVA at least offers one of the least deceptive of mirrors for companies seeking to know whether they are the fairest of their peers.
|What The Acronyms Mean|
|MVA||Market Value Added||The difference between total market value (value of equity and debt) and invested capital (money/cash investors contributed to the business). It measures the difference between what investors “put” into the company and what it is currently worth. MVA is also equal to the present value of all future EVAs.|
|EVA||Economic Value Added||Real measure of economic profit. This is calculated by reducing the full cost of capital from NOPAT — net operating profit after taxes. The full cost of capital captures the opportunity cost of all invested capital at the blended cost of equity and debt as applied by the specific business.|
|P Score||A measure of performance based on one-year sales growth; EVA/sales; EVA/capital; and one-year change in EVA over capital.|
|R Score||A measure of riskiness. It looks at stock-return volatility, leverage, cash flow, and size.|