Value added

What it means

Value added is a line in the Slovak profit and loss statement showing the value a company created over and above purchased goods, materials and services. It is calculated as the trading margin plus production minus production consumption.

Wages and contributions, depreciation, taxes and interest are paid out of value added, and what remains is profit. It is therefore a good indicator of how much real value a company generates, regardless of how much merchandise simply passes through it.

A trading company with turnover in the millions may have little value added if it merely resells goods at a thin margin. Conversely, an advisory firm with smaller turnover has high value added, because most of its revenue comes from its people's work rather than purchased inputs.

How it works in practice

The ratio of value added to sales shows what share of revenue the company actually creates. Value added per employee measures labour productivity and can be compared with competitors or sector averages from published statements.

When planning pay, it helps to watch the ratio of personnel costs to value added. If it rises towards the whole of value added, little is left for depreciation, interest and profit, and the company loses room to invest.

Value added is also used to assess investments and grants. Projects that raise value added per employee, such as automation or in-house development, tend to score better under the criteria of support programmes.

What to watch out for

Value added in the statement is not the same as the VAT base or the economic concept of value added in national accounts. It is an accounting measure with a specific definition and must be calculated the same way for any comparison.

A change in sourcing, for example replacing employees with external contractors, shifts costs from personnel costs into production consumption and lowers value added even though profit does not change. Analysis must take such structural changes into account.