What is Cash Value Added (CVA) and when should I use it?

Question

AcadiFi · Accepted Answer

Cash Value Added (CVA) replaces accounting earnings with operating cash flow to strip out non-cash distortions. It is popular in European research circles where capital-intensive firms dominate.

CVA = Operating Cash Flow - Economic Depreciation - (WACC × Gross Invested Capital)

CVA differs from EVA in three ways:

1. Uses cash flow, not NOPAT, so it avoids accrual noise.
2. Uses economic depreciation (annuity that recovers gross asset cost at WACC over asset life) instead of accounting depreciation.
3. Uses gross invested capital (original cost, not net book) to remove age-of-assets distortion.

For Fjordline Shipping with a 20-year fleet life:

- Operating Cash Flow = $340M
- Gross Invested Capital = $2,800M
- WACC = 7.5%
- Economic depreciation (annuity to recover $2.8B over 20 years at 7.5%) = $275M
- Capital Charge = 0.075 × 2,800 = $210M
- CVA = 340 - 275 - 210 = -$145M

EVA on the same firm might be +$30M because accounting depreciation is lower on older assets, flattering NOPAT. CVA reveals that Fjordline is not generating enough cash to replace the fleet while paying capital providers.

Use CVA when:

- Asset bases are old and depreciation tables understate replacement cost.
- Firms are capital-intensive (shipping, utilities, mining).
- Cross-vintage peer comparisons are needed.

What is Cash Value Added (CVA) and when should I use it?

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