Value added
In one sentenceThe difference between the business's sales and the materials and services it bought from others; it is what the business added through its own effort and is distributed to wages, financing, the state, and owners.
Simply put
A factory that buys materials for one million and sells products for two million has added value of one million riyals. That million covers employee salaries, financing cost, Zakat or tax, depreciation, and profit.
The indicator shows how far the business relies on what it makes itself compared with reselling what it buys.
Worked example
A furniture factory made sales of 5,000,000 SAR during the year, and bought raw materials and services from suppliers for 3,000,000 SAR.
Sales5,000,000 SAR
− Materials and services bought from others3,000,000 SAR
Value added = 5,000,000 − 3,000,0002,000,000 SAR
Formula: Sales − materials and services bought from others
Don't confuse it with
Value added taxVAT is a tax imposed on supplies at 15% and collected from the consumer, while value added here is an economic measure of what the business produced.