EVA : Economic Value Added

EVA is a synthetic criterion to appraise the firms capacity to create value for its stockholders

EVA : Economic Value Added

EVA WAS CREATED IN THE LATE 80s BY TWO AMERICAN CONSULTANTS : STERN AND STEWART.
EVA IS A SYNTHETIC INDICATOR TO MEASURE THE FIRMS CAPACITY TO CREATE WEATH, TO CREATE VALUE, ENRICHMENT FOR THE SHAREHOLDERS. EVA IS CALCULATED FOR ONE COMPANY AT A GIVEN MOMENT. IT IS A KIND OF SNAPSHOT DONE AT A GIVEN MOMENT.

EVA : Economic Value Added

EVA is the financial performance measure that comes closer than any other to capturing the true economic profit of a company.

EVA : Economic Value Added

METHODOLOGY TO CALCULATE EVA : 1/ EVA is an equation : EVA = ( NOPAT / Capital Employed WACC ) * Invested capital
2/ It is also possible to consider the following equation : EVA = NOPAT Capital * WACC The two equations are equivalent and lead to the same result.

EVA : Economic Value Added

METHODOLOGY TO CALCULATE EVA : EVA = ( NOPAT / Capital Employed WACC ) * Invested capital
It is necessary to calculate intermediate calculations such as NOPAT, Capital invested, capital employed, financial balance sheet and the WACC. The following pages will show the detailed steps to do in order to get EVA.

STEP1:Draw up headlines from balance sheet

Financial Balance sheet :

CURRENT : CASH RECEIVABLES INVENTORY FIXED : INTANGIBLE TANGIBLE FINANCIAL

Fonds propres SHORT TERM LIABILITIES OVERDRAFT NOTES PAYABLE SHORT TERM LOANS Dettes L&MT
LONG TERM LIABILITIES SHAREHOLDERS EQUITY Dettes CT

STEP2:Change into a financial balance sheet

Financial Balance sheet :

CASH AND EQUIVALENTS

Fonds propres CAPITAL EMPLOYED :

WORKING CAPITAL

FINANCIAL DEBTS Dettes L&MT EQUITY

FIXED ASSETS

Dettes CT CAPITAL INVESTED = LIABILITIES

CAPITAL EMPLOYED = ASSETS

STEP3:

CALCULATE THE WACC

Weighted Average Cost of Capital :

The Cost of Lease

Fonds propres CAPITAL INVESTED :

The Cost of a Loan

LEASING Dettes L&MT CLASSIC DEBTS EQUITY Dettes CT

The Cost of Equity

STEP3:

CALCULATE THE WACC

1/Weighted Average Cost of Capital : Average cost of each liability part

2/ Average cost of capital weighted by the importance of source of finance

Cost of Equity : Linked to shareholder s profits Gordon and Shapiro // Markowitz and Sharpe

Cost of a Loan : The cost is estimated using a rate r, symbolizing the total costs and tax savings linked to the loan. This is a rate which equalizes sums actually received by the frim, and the sums actually paid out by the firm. Cost of Lease : The cost of leasing is calculated in the same way as a cost relating to a loan

STEP4:

CALCULATE NOPAT

NOPAT = Net Operating profit after tax NOPAT is calculated from the income statement ( Profit or Loss Statement )

NOPAT = ( Operating Profit + financial income ) * ( 1 CTR ) CTR : Company Tax rate Ex : Calculate NOPAT from the following data Sales 1.000.000 USD Purchases 200.000 USD Wages 300.000 USD Depreciation 100.000 USD Financial expenses 120.000 USD Financial income 80.000 USD Income tax rate ( company tax rate ) : 40% See solution next slide !

STEP4:

CALCULATE NOPAT

NOPAT = Net Operating profit after tax NOPAT is calculated from the income statement ( Profit or Loss Statement )

NOPAT = ( Operating Profit + financial income ) * ( 1 CTR ) Operating profit is : 1.000.000 Purchases 200.000 Wages 300.000 Depreciation 100.000 = 400.000 NOPAT = ( 400.000 + 80.000 ) * ( 1 CTR ) = 480.000 * ( 1 40%) NOPAT = 288.000