Shareholder Value Analysis#

Metadata#

• Name: shareholder-value
• Description: Shareholder Value Added (SVA) and economic profit analysis
• Triggers: shareholder value, SVA, economic profit, valuation, capital allocation

Instructions#

Analyze how business decisions create or destroy shareholder value.

Framework#

The SVA Identity#

text

SVA = NOPAT + Change in Working Capital - CapEx + Market Value Change

Where:
- NOPAT = Net Operating Profit After Tax
- Change in Working Capital = (Ending WC - Beginning WC)
- CapEx = Capital Expenditure
- Market Value Change = (Ending MV - Beginning MV)

SVA Components#

ComponentFormulaDefinitionNOPATEBIT × (1 - Tax Rate)Profit after tax, available to all stakeholdersWC ChangeΔWorking CapitalInvestment/recovery from operationsCapExNew Fixed Assets - DisposalsInvestment in growth or efficiencyMV ChangeΔMarket ValueChange in intrinsic business valueEconomic ProfitNOPAT + Cost of Capital (WACC × Capital)True economic profit created

Output Process#

1. Define scope - Business unit or entire company
2. Gather data - Financial statements, market valuations
3. Calculate NOPAT - EBIT, taxes, interest
4. Calculate components - WC change, CapEx, MV change
5. Compute SVA | Apply SVA identity
6. Analyze economic profit - Calculate cost of capital
7. Assess value creation - Positive vs negative SVA
8. Recommend strategy - Value-creating or value-destroying

Output Format#

text

## Shareholder Value Analysis: [Subject]

### Executive Summary

| Metric | Value | Assessment |
|--------|-------|------------|-------------|
| **NOPAT** | $X M | ✅ Profitable base |
| **Economic Profit** | $Y M | ✅ Value created |
| **SVA** | $Z M | ⬆️ Value added | ⬇️ Value destroyed |
| **ROI** | X% | ✅ Above cost of capital |

---

### SVA Calculation

| Year | NOPAT | WC Change | CapEx | MV Change | SVA |
|------|------|----------|--------|----------|--------|
| 2024 | $X M | -$Y M | $Z M | $W M | $A M |
| 2025 | $X M | +$Y M | $Z M | $W M | $B M |
| 2026 | $X M | +$Y M | $Z M | $W M | $C M |
| 2027 | $X M | +$Y M | $Z M | $W M | $D M |
| **Total** | $X M | $Y M | $Z M | $W M | $Σ SVA |

---

### Value Creation Analysis

**Value Created (Σ Positive SVA)**
- Years: [Which years added value]
- Cumulative: $X M
- Drivers: [What created value?]

**Value Destroyed (Σ Negative SVA)**
- Years: [Which years destroyed value]
- Cumulative: $Y M
- Drivers: [What destroyed value?]

### Economic Profit Analysis

| Year | NOPAT | Capital Employed | Cost of Capital (10%) | Economic Profit |
|------|--------|----------------|-----------------------------|----------|
| 2024 | $X M | $Y M | $Z M | $A M |
| 2025 | $X M | $Y M | $Z M | $B M |
| 2026 | $X M | $Y M | $Z M | $C M |
| 2027 | $X M | $Y M | $Z M | $D M |
| **Total** | $X M | $Y M | $Z M | $Σ SVA |

---

### Investment Evaluation

| Project | SVA | NPV | IRR | Payback | Decision |
|---------|------|---------|---------|------------|
| [Project A] | $X M | $Y M | Z% | X years | [Approve/Hold/Reject] |
| [Project B] | $Y M | $W M | Y% | X years | [Approve/Hold/Reconsider] |
| [Project C] | $Z M | $V M | W% | X years | [Approve/Hold/Reconsider] |

### Strategic Implications

**Value-Creating Strategy:**
1. [Implication 1] - [Analysis]
2. [Implication 2] - [Analysis]

**Value-Destroying Strategy:**
1. [Implication 1] - [Analysis]
2. [Implication 2] - [Analysis]

**Capital Allocation Strategy:**
1. [Strategy 1] - [Analysis]
2. [Strategy 2] - [Analysis]

Tips#

• SVA focuses on cash flow, not accounting
• Market value changes are speculative - be cautious
• Economic profit reveals true value creation
• Compare cost of capital across projects
• Consider WACC carefully - affects all valuations
• Multi-year analysis smooths volatility
• Terminal value assumptions have huge impact - test scenarios

References#

• Rappaport, Alfred. Creating Shareholder Value. 1998.
• Copeland, Thomas & Weston, J. Fred. Financial Theory and Corporate Policy. 1988.