Economic Value Added
The Economic Value Added ( EVA) or Economic Value Added (EVA ) is a measure of the financial industry in order to calculate the profitability of an investment. EVA represents a residual income and results in a net absolute size of a profit after deducting capital costs for the total capital employed. Simplified: EVA = capital proceeds less cost of capital. In a similar vein, the Du Pont scheme aims, however, is parked on the ROI.
Calculation
The calculation is presented equations in two ( mathematically identical ):
- NOPAT = net operating profit after taxes (net operating profit after taxes)
- WACC = weighted average cost of capital ( weighted average of debt and equity costs)
- NOA = net operating assets (invested capital or assets required for operations )
- ROCE = NOPAT / NOA = return on capital employed ( return on investment )
Formula (1) is referred to as capital batch formula. As a value spread formula formula (2 ) is referred to. The advantage of (2 ) is the more visible link between return on investment, cost of capital and value growth. Once the capital employed (ROCE ) exceeds the cost of capital ( WACC), an investment creates value.
Development
EVA was developed by the consulting firm Stern Stewart & Co, which has become the trademark by the abbreviation EVA secured. The translation into German, GWB is protected by Siemens AG. According to a study by KPMG took in 2000, twelve of the 30 DAX companies the EVA as a control parameter. The index is designed to facilitate the analysis and evaluation of companies, parts of companies or projects and also serve as a basis for incentive control (see performance-based compensation ). A recent development in the value-based performance measurement is the indexed operating performance measure, which decomposed value contributions based on the Economic Value Added in the components of the value driver tree. The indexed operating performance measurement enables the cycle- independent measurement of the performance and standardized comparison of the figures.
Transformations
As reported by others, of Stern Stewart & Co has recognized the problem of accounting- based data. By accounting policy choice, the data are not comparable across companies and therefore less nutritious for shareholders. Therefore, numerous proposals for reshaping ( Conversion) the numbers are made. According to Stern Stewart & Co notwithstanding, the number of total possible transformations at 164, but marketing it is here partly assumed and on the other adjustments are often too expensive, than they would be economically viable. Adjustments are therefore Virtually company individually made , usually three to five. The adjustments are usually divided into four categories:
Criticism
For the EVA is the fact that it is easy to understand and can be communicated, as it is based on the numbers of accounting.
However, the EVA is easily manipulated on the balance sheet items NOPAT and CAPITAL. Depreciation lead to distortions, since the omission of investment CAPITAL decreases and therefore the EVA increases over time, but that added value was created without. Thus, the incentives are wrong, and the investment of management commitment can be inhibited. This is especially the case if paid under performance-based salary components of EVA.
In addition, this excess size is einperiodisch and is based on backward-looking balance sheet data. This disqualifies them as a performance measure for a future- oriented business analysis, since future potential and cash flow performance is not taken into account. For a company valuation or project evaluation of the EVA is thus only of limited use.
Criticism is often fixed to the conversions. Due to the vast selection of the desired comparability is reduced again. The different origin of the data is meeting criticism.
In the recent literature, a simplified calculation of Economic Value Added is recommended that bears the communicability of the ratio calculation and can be easily used in value-based bonus systems (see performance-based compensation ).