eva anu devassy

8/9/2019 EVA anu devassy

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BY : ANU DEVASSY

Economic Value Added (EVA)Concept

1


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Background of EVA

New Value based performance measuredeveloped by a New York Consulting

firm, Stern Steward & Co in 1982

The object of EVA is to promote value-maximizing behavior in corporatemanagers


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What is EVA

EVA is single, value based measurethat was intended to evaluate

Business strategies

Capital projects

Maximizing the long-term shareholderswealth


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What is EVA (contd..)

EVA establishes clear andaccountable links among

Economic Return:strategic thinking, capitalinvestment

Accounting Returns:

operating decisions and

Shareholders Returns:shareholder value

EVA

Shareholders Returns

Accounting

returns

Economic

Returns


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Why EVA

EVA sets managerial performancetarget and links it to reward system

which motivates the managers tobehave like owners.

EVA allow managers to have discretionand free range creativity keeping thelong term object in mind.


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EVA Concept of Profitability

A successful firm should earn atleast its costof capital.

Firms that earn positive/higher returns thanfinancing costs benefit shareholders andenhance shareholder value.

Until a business returns a profit that is greaterthan its cost of capital, it operates at a loss

Peter F Drucker in an article in Harward Business Review


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Object of EVA is to know

Whether the Entrepreneurs are really increasing

the Net Worth of the Organization or they aredestroying it gradually

The Real growth Entrepreneurs have added to

the ShareholdersWealth.


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Concept of EVA

Shareholders Value is created by

MAXIMIZING

ECONOMIC PROFITS


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What it measures

Creating value

The Company which earns HigherReturns (Net Operating Profit AfterTax) than the Cost of Capital

ARE CONSIDERED AS

HAS CREATED THE VALUE


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What it measures cont..

Destroying value

The company which earns LowerReturn (Net Operating Profit After Tax)than the Cost of Capital

ARE CONSIDERED AS

Destroyers of Shareholders Value


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Strategies for increasing EVA

Increase the return on existing projects(improve operating performance)

Invest in new projects that have a return

greater that the cost of capital Use less capital to achieve the same return

Reduce the cost of capital

Liquidate capital or curtail further investment in

sub-standard operations where inadequatereturns are being earned.


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Hence in the EVA there are three way to

increase value Operate: Improve the return earned on existing

capital

Build: Invest as long as returns exceeds cost of

capital Optimize: Reduce cost of capital by optimizing

capital structure


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EVA

Goal Setting

ShareholderCommunication

CapitalBudgeting

Performance

MeasurementFinancialPlanning

IncentiveCompensation


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Advantages of EVA EVA is more than performance management,.

It is motivational, compensation basedmanagement system that facilities economicactivity and accountability at all levels in thefirm.


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Limitations of EVA

EVA is based on financial accounting methods that can bemanipulated by managers by using different method of accounting.

There are different ways to calculate NOPAT and COC as there arenumerous fundamental differences exist with regard to calculation ofNOPAT and COC

There are 164 adjustment which is really cumbersome exercise

EVA may focus on immediate results which diminishes innovation EVA is biased against new assets

EVA is in favour of large companies

EVA favours more debt compared to equity

It is difficult to implement

Implementation includes significant cost EVA does not study business drivers like consumer satisfaction or

learning and growth.


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List of few Companies in India

implementing EVA and its objective

INFOSYS -

MARICO - DR. REDDYS LABORATORIES -

TCS -

Godrej -


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Why EVA is implemented by only

few companies Implementation of EVA is costly affair

The process is challenging and time consuming and toocomplicated for small business

Especially the key persons (Top and middle managers) haveto understand and commit to EVA thoroughly which isdifficult

Switching over to EVA from the earlier traditional methods ofbonus system may create resistance in the employees

EVA does not have system of Minimum and maximum capfor bonus as the traditional methods have.


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Thanks

eva anu devassy

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