ECONOMIC VALUE ADDED

Submitted by :- Aashima
(8907)
INTRODUCTION

 Econonmic value added is closely related to the

concept of residual income . EVA is registered
trademark of sten stewart & co. which has
actually trdemarked an old concept that has been
known in the academic world with the name
Residual income, for more than 100 years .
MEANING

 EVA measures the profitability of an enterprise

after taking into account the cost of all kind of
capital including equity.
 Enterprises which earn higher return than cost
of capital , they are called value creators.
 Enterprises that earn lessor return than the cost
of capital , they are deemed to destroyers of
shareholder’s value.
MEANING
 Basically EVA is the difference between the net
ooperating profit and oportunity cost of all capital
invested in an enterprises. It is the measures to
caluclate what is left for the shareholder after
paying off interest and charging the expected cost
of capital for the shareholders.
 EVA is estimate of true economic profit .
CAPITAL CHARGE
 Capital charge is the most important aspect of
economic value added . i.e. to assess the
performance of an enterprise , the capital charge
(interest on capital employed ) is to be treated as
expense.
 By considering the interest on capital employed,
EVA shows the amount wealth a business has
created or destroyed in each reporting period.
FEATURES OF EVA

 The most accurate value-based measure of

financial performance.
 A variation of residual income.

 Practically the same as economic profit.

 A measures indicating the amount of

shareholder’s wealth created or destroyed during
an accounting period.
 A framework for complete financial management.
HOW TO IMPROVE EVA

 Reducing capital employed without effecting the

earnings.(e.g. rejecting unproductive assets)
 Employ capital productively.

 Reduce the capital cost

 Employing more debt into businesses since it is

cheaper than equity capital.
 Investing funds in those projects which earn
more return than the cost of capital.
ADVANTAGES OF EVA
 The main advantage of using EVA is that it
takes into consideration all the costs including
the cost of equity capital which is ignored in
normal accounting.
 EVA provides for better assessment of decision
that effect balance sheet , income statement.
 EVA is very useful performance indicator.
 Helpful for the management while taking
managerial decisions.
 EVA is a good guide for the investor as they can
deicde weather a particular company is worth
investing money in or not.
DISADVANTAGES OF EVA

 The main disadvantage is the practicability of the

calculations. As it is difficult to calculate the
correct cost of equity.
 It is not suitable for all size of companies.

 EVA is based on financial accounting methods

that can be manipulated by managers.
CONCLUSION

 As a performance measure, economic value added

forces the organisation to make the creation of
shareholder value the number one priority. EVA
is changing the way managers run their
businesses. So that EVA is useful for calculating
economic profit and also helpful for investors to
take their decisions.
THANK YOU !