Added value and company valuation

added value

What is a company's added value?

Value added is a fundamental concept in economics and accounting, measuring the creation of wealth by a production unit (such as a company). It is the difference between the value of production and the value of intermediate consumption used for this production.

In other words, value added is the value a company adds to its inputs (raw materials, energy, services) through its production activity. It represents the company's contribution to national output.

The formula for calculating added value is :

Value added = Production value - Intermediate consumption

Added value is distributed among the various economic players: it is used to remunerate employees (wages), the State (taxes), shareholders (profits), and to self-finance the company (cash flow). It is therefore an essential concept to analyze when valuing acompany?

In France, Insee measures value added in its national accounts, and it is a key element in the calculation of gross domestic product (GDP).

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How is added value divided between wages, EBITDA and taxes?

According to INSEE, in 2020, companies in the mainly non-agricultural and non-financial market sectors generated sales of €3,666 billion and added value of €1,044 billion.

Industry and commerce alone account for two-thirds of total sales and just under half of total value added. Companies' intermediate consumption is highly dependent on their activity. Industry is a major consumer of inputs (energy, raw materials, spare parts, etc.).

Its rate of added value is therefore structurally lower (26.6%) than that of the business services sector (53.8%), whose activity requires few inputs but highly qualified personnel (design office, financial management, etc.).

The added value generated by companies is distributed among the various private and public players in the economy. Thus, a share of added value is allocated to the factors of production (labor and capital).
In 2020, compensation of employees represented 51% of added value, while the share of capital, via gross operating surplus (EBITDA), amounted to 24%.

After remuneration of production factors, the remaining value added goes to the State in the form ofproduction taxes (net of subsidies) (6%) and social contributions (20%).

This share of added value varies from sector to sector, reflecting differences in production structure: the greater the capital, the greater the share of added value that remunerates it.
For example, in industry, a highly capital-intensive sector, EBITDA represents 25% of added value, while in the accommodation and catering sector, it accounts for just 11%.

In 2020, among companies in the mainly non-agricultural and non-financial market sectors, excluding micro-entrepreneurs, half of all microenterprises generated less than 15,400 euros of value added each, while half of all large enterprises (GE) generated more than 692 million euros each. Within a company category, disparities are considerable, particularly among microenterprises: the interquartile ratio is 19, compared with 3 for the other categories.

In 2020, for half of all independent, employing legal units, productivity per full-time equivalent (FTE) was less than 50,000 euros, while for half of all French-controlled (respectively foreign-controlled) multinationals, it exceeded 71,000 euros per FTE.

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Comparison with our European neighbors

The proportion of VA devoted to wages ranges from40% in Italy to 59% in Slovenia. It is 51% in France. Excluding Ireland, the share of EBITDA is highest in Malta (58%). It is lowest in France, whereEBITDA represents 24% of VA.

Between 2008 and 2020, a period marked by the financial crisis and the Covid-19 crisis, the margin rate for EU NFCs fell from 41.5% to 40.3%. This decline reflects stronger growth in value added than in EBITDA (+23% and +20% respectively). Margin rates fell in two-thirds of EU countries. Greece and Slovakia recorded the sharpest declines (-17 and -13 points). Margin rates increased in some countries, such as Denmark and Poland (+4 points). In France, the margin rate, which was lowest in 2008 and will remain so in 2020, fell by 1.2 percentage points over the period, from 33.0% to 31.8%.

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    References :

    • INSEE (https://www.insee.fr/fr/statistiques/6666967?sommaire=6667157)
    • Statista (https://www.statista.com/statistics/947862/eu-value-added-by-enterprise-size/)

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