Let’s look at another useful market based ratio which is known as the Market value added ( MVA).
MVA is the difference between the market value of the company and the total capital invested in the company.
The formula of MVA is =
market capitalization ( number of equity shares issued x market price per share )
less:
net worth ( share capital + reserves – accumulated losses)
This Market value added(MVA) ratio gives us an indication of how the market perceives the company’s future EVA (economic value added). Naturally, the higher the value added, the more in demand the company’s shares.
Simple illustration:
On 30 th April 2006,Company A Ltd has the following details:
(a) 500,000 shares @ $10 each issued;
(b) market price per share =$22
(c) reserves ( $3.5m) & losses ( $2.0m)
To compute the MVA of Company A Ltd
firstly need to compute:
(a)Market capitalization=500,000 shares x$22 =$11.0m
(b) Net worth ( share capital($5m)+reserves($3.5m)+losses(-$2m) =$6.5m
MVA=
Market capitalization – net worth = $11.0 -$6.5m =$4.5m
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