The Economic Result (often called Economic Profit -EP- or EVA for Economic Value Added, a trademark registered by the firm Stern Stewart) and the MVA (Market Value Added) are two sides of the same coin: one measures periodic performance (flow), the other the accumulated value (stock).

Here are their precise definitions and the mathematical and financial link between them.

1. Definition of Economic Profit (EVA)

The Economic Profit measures the financial performance of the company over a given period of time (usually a year). Unlike the traditional accounting result, it takes into account the cost of all capital, including equity.

The principle: A company only creates wealth if its economic profitability is greater than the cost of the resources mobilized to finance it. The EP corresponds to the surplus wealth generated by the activity after remunerating all investors (creditors and shareholders) at the rate required by the market, the WACC (cost of capital).

Calculation formulas: there are two equivalent ways to calculate it:

• Operational Approach (most common):It compares the operating profit after tax with the cost of capital employed.

EP = EBIT × (1 – T) – CE × WACC

• EBIT: Operating profit.
• T: Tax rate.
• CE: Capital Employed (Net Operating Assets).
• WACC: Weighted Average Cost of Capital.

It can also be expressed as a percentage: EP (%) = ROCE after tax – WACC.

• Shareholder Approach: It shows whether the net result is sufficient to cover the shareholders’ profitability requirement.

EP = Net Income – EQ × E(ROE)

• EQ: Equity.
• E(ROE): Expected return on equity (cost of equity).

2. Definition of MVA (Market Value Added)

MVA measures the cumulative absolute value creation of the company. It represents the difference between the market value of the company (what investors are willing to pay today) and the amount of capital that has been invested in it.

The calculation:

MVA = Enterprise Value – Capital Employed (Book value)

Or, from the point of view of the shareholders alone:

MVA = Market Capitalization – Accounting Equity.

If the MVA is positive, it means that the company is worth more than the sum of the capital invested: it has created value. If it is negative, it has destroyed wealth.

3. The fundamental link between EVA and MVA

The link between the two concepts is direct: the value (MVA) is nothing more than the discounted sum of future performance (EVA).

The mathematical relationship: The MVA is equal to the sum of all expected future economic experience (FTE), discounted at cost of capital (WACC).

$\mathrm{MVA}=\sum _{\mathrm{t}}\frac{\mathrm{EVA}\left(\mathrm{t}\right)}{{(1+\mathrm{CMPC})}^{\mathrm{t}}}$

Managerial interpretation:

• Performance creates value: To increase its market value (MVA), a company must generate positive and growing EVAs. MVA is the stock market “penalty” for the company’s ability to generate future EVAs.
• The role of growth: Growth is not a source of value in itself, but an accelerator.
  • If the EVA is positive (ROCE > WACC), the growth increases the MVA.
  • If the EVA is negative (ROCE < WACC), growth destroys value and reduces MVA.

In summary, the EVA is the annual management indicator (the flow of wealth) which, if it is positive and sustainable, builds the MVA (the stock of wealth) observed on the markets.