| Definition |
Shareholder Value Analysis (SVA) is the process of analysing how decisions affect the net present value of cash to shareholders. The analysis measures a companys ability to earn more than its total cost of capital. This tool is used at two levels within a company: within an operating business unit and for the corporation as a whole. Within business units, SVA measures the value the unit has created by analysing cash flows over time. At the corporate level, SVA provides a framework for evaluating options for improving shareholder value by determining the trade-offs between reinvesting in existing businesses, investing in new businesses and returning cash to stockholders. |
| Implementation |
SVA consists of three primary analyses:
- Determining the actual costs of all investments in a given business, discounted to the present, using the appropriate cost of capital for that business
- Estimating the economic value of a business by discounting the expected cash flows to the present
- Determining the economic value of each business by calculating the difference between the above analyses.
This tool requires a thorough understanding of each business in order to accurately determine the amount of investments and the expected cash flows that these investments will yield. |
| Purpose |
SVA is used either as a tool to aid in one-time major decisions (such as acquisitions, large capital investments or division breakup values) or as a methodology to guide everyday decision making throughout the organisation. When used as an everyday tool by line managers, SVA can be applied in many ways to:
- Assess the performance of the business or portfolio of businesses:
Since SVA accounts for the cost of capital used to invest in businesses and the cash flows generated by the businesses, it provides the user with a clear understanding of the value creation or degradation over time within each business unit
- Test the hypotheses behind business plans:
By understanding the fundamental drivers of value in each business, management can test assumptions used in the business plans. This provides a common framework to discuss the soundness of each plan
- Determine priorities to meet each business full potential:
This analysis illustrates which options have the greatest impact on value creation, relative to the investments and risks associated with each option. With these options clearly understood and priorities set, management has a foundation for developing an implementation plan
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