|Net cash flow||Added value||Excess shareholder|
over life of
This appendix considers some more technical problems which arise in constructing, and interpreting, added value statements.
Glaxo's added value statement was presented in Table 2.2. As was emphasized there, added value is less than operating margin or profits because profits are constructed after subtracting interest on long-term debt from operating margin, and added value is calculated after subtracting a return on equity capital from profits. The range of relationships involved is shown in Fig. A13.1.
Value added is described as net output in Fig. A13.1, and in Chapter 2. My use of the term added value to describe rent, and in a sense clearly distinct from the economist's use of the concept of value added, may be confusing to some. But the economist's use of the word rent is quite unhelpful to non- economists--who immediately associate rent with property. And value added is widely used by non-economists when they mean, at least approximately, what an economist would prefer to describe as rent. When people say, 'A developing economy should move to higher value added activities', they do not mean that the degree of vertical integration should be increased. They advocate a shift to more highly differentiated products.
As Fig. A13.1 shows, the added value statement focuses on the operating activities of the firm, in contrast to usual financial statements which emphasize the returns to its investors. For this reason, the added value statement is best considered at the level of the operating business, rather than for the firm as a whole. Often it is not possible to assess this from published accounts, but Table A13.1 provides a breakdown of the activities of BAT Industries. BAT is a UK-based international tobacco company which has recently diversified into