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WHAT IS EVA ?

EVA is a measure of financial performance


based on the context that all capital has a
cost and that earning more than the cost of
capital creates value for shareholders.
Economic Value Added is defined as net
operating profit after taxes and after the cost
of capital.
 EVA = Net Operating Profit – Taxes – Cost of Capital

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Components of EVA
 Non operating profit after tax.
 Capital employed
 Capital cost rate
 Return on net assets
EVA CALCULATION STEPS
• Calculate Net Operating Profit After Tax
(NOPAT).
• Identify company’s Capital (C).
• Determine a reasonable Capital Cost
Rate(CCR).
• Calculate company’s Economic Value
Added (EVA)
ADVANTAGE’S
• CALCULATED FOR DIVISIONS AND EVEN
PROJECTS
• GUAGES PERFORMACE OVER A PERIOD OF
TIME
• NOT BOUND BY GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES(GAAP)
• MEASURE OF FIRMS ECONOMIC PROFIT
EVA: A FLOW CHART

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AREA’S OF APPLICATION
• CHANGING ORGANISATIONAL BEHAVIOR
• GENERATES SUFFICIENT CASH TO
REINVEST
• SUSTAINABLE GROWTH
• PHARMACEUTICAL MARKET PLACE
• EVA LINKED COMPENASATION( TCS)
• PROFIT PRUNING
EVA/MVA
Economic value added Market value added
• Attempts to measure • Difference between
the true economic current market value
profit produced by a of company & capital
company. contributed by
• Performance metric investors.
• Useful for investor- • Wealth metric.
determine the • Improves the book
company value. value of the company
shares.
EVA/NPV
EVA NPV
Benett Stewart-to  Peccati -
measure the value of decomposition of
the firm. the NPV of a
More financial project.
immediateness and  Less immediateness
incisiveness and incisiveness.
Accounting figures  Market values.
Summary of EVA theory
• EVA is a method to measure a company´s true
profitability and to steer the company correctly from
the viewpoint of shareholders.
• EVA helps the operating people to see how they can
influence the true profitability (especially if EVA is
broken down into parts than can be influenced).
• Clarifies considerably the consept of profitability (the
former operating profit/capital (ROI %) -observation is
turned into EVA (FIM, $, £) -observation)
• EVA improves profitability usually through the
improved capital turnover
Companies have usually done a lot in cutting costs
but there is still much to do in improving the use of capital
• EVA is at its best integrated in incentive systems
Conclusion
• EVA is both a measure of value and also a measure of
performance. The value of a business depends on investor’s
expectations about the future profits of the enterprise. Stock
prices track EVA far more closely than they track earnings per
share or return on equity. A sustained increase in EVA will bring an
increase in the market value of the company.
• As a performance measure, Economic Value Added forces the
organization to make the creation of shareholder value the
number one priority. Under the EVA approach stiff charges are
incurred for the use of capital. EVA focused companies
concentrate on improving the net cash return on invested capital.
• EVA is changing the way managers run their businesses and the
way Wall Street prices them. When business decisions are aligned
with the interest of the shareholders, it is only a matter of time
before these efforts are reflected in a higher stock price.