Value added is the amount by which the value of goods or services are increased by each stage in its production. It is the difference between the value of all the inputs (raw materials, purchased services) and the price at which the product is sold.
A company's value added is the total amount of value added by all a company's activities. It is:
sales - payments to suppliers
Value added can be decomposed into three components:
- employees emoluments
- taxation
- returns to providers of capital (interest and dividends).
Money that is retained by a company is part of the return to providers of capital as it is still owned by the shareholders.
Value added is used as a basis for taxation: i.e. VAT.
Value added is used as a measure of the size of national economies, GDP is the sum of value added of all firms in an economy. Value added can similarly be used as a measure of the size of a company. As a measure of size it is rarely of interest to investors as it can not be related to valuation measures — EV and market cap are more relevant. It does give a more meaningful answer to the question "how big is this company?" than turnover or profits because it is not distorted by the amount of vertical integration or by low margins.
Value added statement
An accounting statement based on the concept of value added, the value added statement, shows:
- sales
- amounts paid to suppliers
- the distribution of value added; its division between tax, employees and returns on capital.
The value added statement has enjoyed periods of popularity in several countries, but has never really established itself. It is often seen as a form of social reporting and its disclosure is often aimed at groups other than investors — for example, it can be a way of demonstrating to workers how large a share goes to them.
It can often be illuminating from the point of view of investors, even if it is not as important as the major accounting statements.