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.
Use variable names from the panel above (e.g. FV, r, n) โ 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% as decimal
Expected revenue / earnings growth rate
growth = 0.08
๐ก You can also enter values directly in the formula: 10000 / (1 + 0.08)^10
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โฌ Export Calculation
Exports a plain .txt file with your expression, formula, all variable values, result, and educational notes โ ready to paste into any report, Word doc, Notion, or Google Docs.
The exported file includes the formula in standard mathematical notation โ 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 ยท 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 โ WACC) ร invested capital. Positive EVA = value creation. Negative EVA = value destruction (even if accounting profits are positive). Growth only adds value when ROIC > WACC โ otherwise growth destroys value.
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Real-World Example: Company: ROIC = 15%, WACC = 9%, invested capital = $1,000M. EVA = (15% โ 9%) ร $1,000M = $60M/year of pure economic value creation. Another company: ROIC = 8%, WACC = 9%, invested capital = $1,000M. EVA = โ$10M/year โ despite positive accounting profits, it's destroying economic value.