Market Value Added - MVA

The purpose of any commercial venture is to create value. You start with lemons, sugar, and ice, then you put them together to make lemonade. In mathematical/capitalist terms, you take $2 of ingredients and make a drink for which people are willing to pay $5.

That concept represents the dynamic behind "market value added." The phrases refers to the amount of value a company has added to the amount of money invested.

A bunch of investors pool $25 million and found a company. They hire smart managers, who turn that $25 million into a company worth $60 million. That situation represents an MVA of $35 million...the $60 million market value minus the $25 million invested in the venture.

In mathematical terms, the MVA represents the difference between the firm's market value and the amount of capital contributed by investors and lenders (so it includes both equity and debt).

The equation: MVA = V - K

V equals the market value and K stands in for all the contributed capital.

MVA can also have a negative value. If that happens, managers should be fired, and maybe everyone should just cut their losses. The company is now worth less than the amount of capital invested: the venture has lost value.