Value Added Equity (SVA)
This method was presented in the work of A. Rappaporta "The creation of the cost of equity: the new standards of doing business."
In the works of A. Rappaport AMB is defined as an increment between two indicators: the cost of equity after an operation and the cost of the same capital before the operation. In Walsh's book, a slightly different interpretation of this approach is given: BUA is treated as an increment between the estimated value of the share capital (operating assets and their respective capital) and the book value of equity. Despite the differences between these two versions of the theory, they are based on the general idea - to determine 8UA it is necessary to determine the market value of the share capital. In a simplified form, this method is very similar to the GCDE method (discounted cost of equity).
The calculation of AMC occurs in accordance with the same steps as the PCRE calculation. At the last stage, a direct calculation of BUA:
BUA = Estimated cost of share capital - Book value of share capital.
Market value added (MVA)
This method serves as a variation of the value-added method. Calculated as the difference between the market value of the company (debt plus equity2) and the amount of invested capital. In relative terms, the indicator is determined by dividing the company's market capitalization (debt and equity) by the amount of invested capital. This method allows you to assess how the financial market now perceives the company's future results in relation to the amount of invested capital.
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Problems in this indicator arise with accuracy of definition and measurement, because both indicators are calculated on the basis of accounting data.
Evaluation of the possibility of combining methods
There are two main competing approaches to assessing the state and value of the company. Classify these two approaches as traditional method
Supporters of DCF emphasize that basing a company's estimate on the basis of accounting data is mistaken for a number of reasons. The main argument is the assertion that accounting data can not reflect the temporal nature of cash flows, as well as those investments that need to be attracted to create these cash flows. In addition, the authors say that accounting data is often subject to manipulation, and also depends on the methods by which they are considered, which, naturally, should not affect the company's value. The idea behind these statements is: the company's value is equal to the discounted value of the expected future cash flows, and there is no possibility to convert both the current accounting data and the expected cash flows at the same time without the initial conversion of accounting "figures" in the company's cash flows.
On the other hand, the accounting data system was originally created to convert the cash flow data into a more convenient form. Therefore, the opinions of the supporters of the SRF model that it is possible to analyze the company's value carefully only if you translate the accounting data back into the cash flow data does not seem quite plausible. Bernard believes that the investment community should recognize that the value of the company can be derived directly as a function of current and predicted accounting indicators, without explicit reference to cash flows.1
In fact, these approaches are difficult to contrast, because they are profoundly different in nature: they have various criteria for evaluating the company's activities and assessing the changes occurring.
The traditional approach is aimed at evaluating the company's performance in the past, balancing cash flows and controlling current operations. The strategic approach is more focused on the company's future achievements: the focus is on the investment qualities of the company, on the uncertainties of future opportunities and future results and on expectations about these results. Therefore, this approach is called market or investment.
Approaches differently interpret certain parameters of the company's activities, such as capital, profitability, profit. This gives rise to a different perception of the company's performance.
One of the most important differences in approaches is that the traditional method fixes only costs for actual transactions, whereas a strategic approach takes into account the opportunity costs from unused capabilities. Alternative costs of investment - the main corrective factor in the analysis of the dynamics of indicators in a strategic approach. In the traditional approach, this factor is inflation, which is adjusted for nominal indicators.
Both approaches have their own advantages for solving certain problems. They are not alternatives to each other, but they expand the company's valuation possibilities in the framework of financial analysis. Therefore, for a more complete analysis, these methods can be combined.
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The theoretical basis for combining approaches in assessing investment attractiveness may be the idea proposed by Kaplan and Norton, 1 on analyzing a company in three time categories: past, present and future . A similar idea is present in the book "What you need to know about stock analysis", where F. Berger talks about the following important aspects for the analysis of investment appeal:
1. Historical analysis of the company. Here we mean the analysis of the dynamics of the indicators of profit, revenue, profitability, net cash flow. Such an assessment is based on a review of past financial statements and publication of materials on the company's activities.
2. Analysis of the company's current situation . Balance sheets are reviewed with respect to past performance results, as well as the impact on the final results of the enterprise of innovation activity, structural changes in business, changes in the company's market positions.
3. The forecast of the company's earnings and associated stock value of shares is in progress. In these forecasts, new product developments play an important role, measures to improve the efficiency of resource use, the level of the company's management.
Thus, for the purposes of assessing investment attractiveness, analytical methods can be used in the following combination: the traditional approach - to assess the past and present financial situation of the company, a strategic approach - to assess the value of the firm in the future. Thus, the approaches complement each other, and this combination of them compensates to some extent the shortcomings of both, allowing to comprehensively evaluate the companies in terms of their attractiveness to investors.
The problem of evaluating the effectiveness of the business does not lose its relevance, but new models should be oriented both to the achievement of current goals and to a strategic goal.
According to different purposes, different methods of effectiveness evaluation are used: in the field of operational management - standard methods of financial and management analysis, in the field of strategic management - various systems of balanced indicators.
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