MVIC (Market Value of Invested Capital)
MVIC is a valuation metric that indicates the market value in terms of invested capital of a company.
In recent years, advancements in valuation techniques have created a progressive evolution in the business world. The era of simplistic and traditional valuation techniques has been replaced by more sophisticated and accurate methods. While the principles of accounting are still used today, they are now applied in more efficient and effective ways. In this regard, MVIC (Market Value of Invested Capital) is a financial term that refers to the value of all invested capital in a company. Considering the dynamic world of finance and investment, MVIC is an important term that should be defined and understood. The purpose of this article is to outline the theoretical framework and practical methodology of MVIC.
MVIC (Market Value of Invested Capital)
To begin, it is important to first understand the concept of MVIC (Market Value of Invested Capital). It is a valuation metric that indicates the market value in terms of invested capital of a company. The entire capital structure, including the combined value of equity and debt capital of a company, is referred to as invested capital in MVIC.
What is invested capital?
To fully understand MVIC (Market Value of Invested Capital), it is necessary to first understand the concept of invested capital. Invested capital can be defined as all sources of capital that have been used by an entity to conduct day-to-day business functions. In other words, invested capital represents all the financial investments made by an organization in order to finance its operations. As a general rule, any type of debt, as well as equity capital, can be included in invested capital. When all of these capital sources are combined, they are referred to as invested capital.
Why should companies calculate their invested capital?
The primary purpose of calculating and evaluating invested capital is to improve capital productivity. This is achieved by measuring the efficiency of a company’s capital structure and capital allocation. Additionally, measuring invested capital enables companies to acquire a better understanding of their long-term financial health. It is also an effective tool for correcting errors and removing imbalanced financial standings. The bottom line is that it is essential for companies to understand their capital structure and its value properly.
Companies can make more informed decisions about their future business strategies in terms of targeting and facilitating growth. Be it a new investment or an expansion into new markets; it is essential to have a clear idea of the company’s financial standing. Thus, continue reading this article to learn more about MVIC (Market Value of Invested Capital) principles, theories, and practical implementation steps.
What is MVIC (Market Value of Invested Capital)?
MVIC (Market Value of Invested Capital) is an approach used to measure the market value of all invested capital in a company. While MVIC (Market Value of Invested Capital) valuation is a financial metric, it is considered one of the most reliable and accurate methods to value a small or private company. The term invested capital in MVIC refers to the value which has been accumulated by a company in order to carry out its business functions. MVIC provides companies with a comprehensive sense of their overall financial health in regard to their capital structure.
In practice, MVIC (Market Value of Invested Capital) is calculated as the sum of equity capital plus the long-term interest-bearing debt. The importance of MVIC lies in the fact that it provides companies with a broader idea of how much their invested capital is worth in relation to their total capital. Therefore, the calculation of MVIC provides founders, potential investors, and other business stakeholders with a better sense of the company’s financial progress and overall performance.
What does MVIC (Market Value of Invested Capital) use for?
The concept of MVIC (Market Value of Invested Capital) is based on the premise that all invested capital in a company can be used to create value. This can be achieved via the efficient allocation and management of invested capital in order to maximize return. In other words, MVIC is a proven method that offers better insight into the value of a company’s capital structure. The outcome of this calculated value can be used to determine the company’s ability to finance future expansion, business development, and growth.
Moreover, the application of MVIC (Market Value of Invested Capital) can be used by companies to measure their performance against other companies in their industry. The use of MVIC is highly relevant in making strategic decisions in regard to business optimization processes. While the calculation of MVIC is entirely dependent on the financial operations of a company and its capital structure.
Small business valuation and MVIC (Market Value of Invested Capital)
The MVIC (Market Value of Invested Capital) calculation is consistently utilized and applied by small business owners. It is through the use of MVIC that small businesses are able to formulate their financials in an accurate and reliable manner. At the same time, it is essential to note that MVIC typically excludes the value of the business-owned property or real estate, any consulting agreement values, and a contingent portion of the business purchase price.
However, MVIC (Market Value of Invested Capital) may include the values of non-compete agreements with the outgoing management team and the value of any current assets that are to be transferred to the buyer. As such, small businesses adopt the use of MVIC in order to measure the market value of their invested capital.
How MVIC (Market Value of Invested Capital) is used to value small/private business
Theoretically, market value refers to the price for which an investment or security can be bought or sold in a market. In this case, MVIC (Market Value of Invested Capital) measures the market value of a company’s invested capital. As we know, the sale of small businesses is often structured as asset transactions, wherein the buyer acquires the assets and liabilities of the company. This signifies the fact that MVIC is used to evaluate the capital structure, which informs the buyer of the value of a company’s assets and liabilities.
Value small business with MVIC (Market Value of Invested Capital) vs equity value
While MVIC (Market Value of Invested Capital) can be considered a good metric to value small businesses, its use is not the same as that of equity valuation. Equity value is basically the market capitalization or can be referred to as the total value of a company or organization that is attributable to equity investors. As such, it is measured in terms of the company’s share price and outstanding shares. Due to the fact that equity market values are heavily influenced by external factors such as share prices, market trends, and investor sentiment, they are considered prone to fluctuation.
That being said, publicly-traded companies tend to use equity value as the basis for their valuation. While small businesses are not publicly-traded, the distribution of shares does not occur. As a result, the MVIC (Market Value of Invested Capital) model considers the internal calculations, including assets and debts. Overall, it is easy to see that MVIC is different from equity valuation. So, How to calculate MVIC (Market Value of Invested Capital)?
Formula and calculation of MVIC (Market Value of Invested Capital)
To better understand the process of MVIC (Market Value of Invested Capital) calculation, it is necessary to take a look at its formula:
MVIC = LTD + SE
MVIC = LTD + SE
- NWC = Net Working Capital
- FA = Tangible Fixed Assets
- IA = Aggregate Intangible Assets
- LTD = Long-Term Interest Bearing Debt
- SE = Shareholder’s Equity
Now let us look at an example. Assume a company that has total assets of $800,000, wherein the tangible assets are worth $500,000, and intangible assets are worth $300,000. While the net working capital is worth $400,000 and long-term debt stands at $300,000. The company has shareholders’ equity worth $100,000. The calculation of MVIC (Market Value of Invested Capital) is carried out by following the following steps.
As per the first formula:
- MVIC = NWC + FA + IA
- MVIC = 400,000 + 500,000 + 300,000
- MVIC = 1,200,000
As per the second formula:
- MVIC = LTD + SE
- MVIC = 300,000 + 100,000
- MVIC = 400,000
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MVIC (Market Value of Invested Capital) is an important tool that allows a company to evaluate the market value of its invested capital. It can be used for business planning, as it helps formulate a company’s investment strategies. MVIC is considered an extensive and reliable method to calculate the market value of invested capital in a small or private company. Are you looking for an expert to help you with the valuation process? Eqvista is here to help with all your financial needs. With the right guidance and expert advice, you are sure to get the best valuation report. Contact us today and get your business valuation!
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