LIVA offers a useful new way to assess returns on equity capital

livemint.com:

Tata Consultancy Services (TCS) shares at the time of its listing on Indian stock markets for public trading back in 2004, what returns would you have generated? According to TCS chairman, N Chandrasekaran, TCS shares had provided a whopping 3,000% return (bit.ly/3PgXEgF) by a certain point in 2021 when the stock traded at around ₹3,200 per equity share (the price is even higher now). How does one explain such a staggering number and what is the quickest way to calculate returns for any company’s stock, for any period, and in any context? The answer could be LIVA: Long-term Investor Value Appropriation (bit.ly/3CqEz3F), a metric developed by Phebo Wibbens and Nicolaj Siggelkow at INSEAD, which is an acronym for Institut Europeen d’Administration des Affaires, a business school, and the Wharton School of the University of Pennsylvania, respectively.

Well known accounting-based measures, such as return on assets (RoA) and return on equity (RoE) assess a company for its short-term performance, and are less potent when making comparisons across an industry, sectors, or indeed while assessing a business for its growth potential. Whereas stock market-based measures such as market capitalization (market cap, for short) and earnings per share (EPS) do reflect growth potential, they do not tell us whether the returns are over and above the company’s cost of capital, i.e., whether the net present value of investment is positive.

According to the two aforementioned researchers at Wharton and INSEAD, LIVA achieves all of the above, and more, using historical share-price data. Simply put, LIVA is the backward-looking net present value of all the investments a firm has made over a period.