Wealth Added Index (WAI)

What is 'Wealth Added Index - WAI'

A metric designed by Stern Stewart & Co consulting firm that attempts to measure wealth created (or destroyed) for shareholders by a company. The WAI takes into account more variables than just the profits or share growth of a company. According to this theory, wealth is created only if the returns of a company exceed its cost of equity.

Explaining 'Wealth Added Index - WAI'

Financial theory says that the cost of equity for a company should be greater than the return available on risk-free securities such as government bonds because a company is riskier. (The greater the risk an investor assumes, the greater the return he or she should require.) So, if a company's returns don't exceed its cost of equity, then shareholders should invest their money elsewhere.

In other words, according to the WAI, if return is less than the cost of equity, the company is actually destroying shareholder value.

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