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Valuation Mechanics🔵 Intermediate

What Changes Would Make This Business Worth More?

What Actually Creates Firm Value?

Understanding value creation means knowing exactly which levers management can pull. It comes down to four things: growth, returns on investment, cost of capital, and how long you can sustain competitive advantage.

ROICEVAValue CreationCapital StructureCompetitive Advantage

Live Result

$60

ƒ: (ROIC - WACC) * invested_capitalraw: 60.0000

ƒ(x)

Use variable names from the panel above (e.g. FV, r, n) — or type numbers directly: 10000 / (1 + 0.08)^10

ROIC% as decimal

Return on Invested Capital

ROIC = 0.15

WACC% as decimal

Weighted Average Cost of Capital

WACC = 0.09

invested_capital

Total capital invested in the business

invested_capital = 1000

growth$

Expected revenue / earnings growth rate

growth = 0.08

💡 You can also enter values directly in the formula: 10000 / (1 + 0.08)^10

⬇ Export Calculation

Exports a plain .txt file with your expression, formula, all variable values, result, and educational notes — ready to paste into any report, Word doc, Notion, or Google Docs.

The exported file includes the formula in standard mathematical notation — you can paste it directly into Excel, Google Sheets, or back into FinanceSheep.

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Learn: What Actually Creates Firm Value?

Valuation Mechanics · Educational Guide

The Core Idea

CEOs say "we're focused on creating shareholder value." But what does that actually mean, mechanically? It means: earn more than your cost of capital (ROIC > WACC), grow efficiently (reinvest at high returns), and do this for as long as possible before competition catches up.

How It Works

Value is created when ROIC > WACC. EVA (Economic Value Added) = (ROIC − WACC) × invested capital. Positive EVA = value creation. Negative EVA = value destruction (even if accounting profits are positive). Growth only adds value when ROIC > WACC — otherwise growth destroys value.

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Real-World Example: Company: ROIC = 15%, WACC = 9%, invested capital = $1,000M. EVA = (15% − 9%) × $1,000M = $60M/year of pure economic value creation. Another company: ROIC = 8%, WACC = 9%, invested capital = $1,000M. EVA = −$10M/year — despite positive accounting profits, it's destroying economic value.

What Changes Would Make This Business Worth More?

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