EVA

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EVA

• Economic Value Added

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Your Ace Consultants

• Brian Fiore
• Savitar Charudattan
• Shaun Woleshin

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The Good, The Bad, The Uglyof EVA
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The Ugly

• Trademark
• EVA Calculation
• EVA vs. MVA

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EVA is Intellectual Property

• The term EVA is trademarked by Stern Stewart
  CO.
• Significance?
• Free Publicity
• Royalties for use of term.

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What is EVA?

• EVA NOPAT - (WACC Total Capital)
• NOPAT 150
• WACC 12
• T.Capital1000
• EVA 150-(.121000) 30
• EVA is the true economic dollar profit based on
  year to year changes
• EVA is a measure of profitability

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EVA and MVA

• MVA measures the value created by management
  since inception of the firm. (MV-BV)
• EVA measures the year to year effects of
  managements decisions.
• The PV of future EVAs MVA

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The Good

• EVA is a better profitability measure
• Increasing EVA yields higher stock price
• EVA analysis can be used to identify any part of
  the firm that creates or destroys value
• EVA works best for

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EVA as a better profitability measure

• Traditional profitability measures have
  limitations
• Net Income and ROE do not account for Ke.
• ROA does not figure in any cost of capital.

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Increasing EVA Increases Stock Price?

• ATT has found a nearly perfect correlation
  between EVA and its stock.
• Since it is a measure of true shareholders
  wealth, if it were to increase, then so would the
  stock price.
• Ways to Increase EVA?

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EVA Analysis

• Step 1 do a sensitivity analysis to determine
  the biggest factor of a firms EVA.
• Step 2 Set Department Goals and Improvement
  Plans
• Step 3 Implement EVA incentive programs for all
  employees.

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EVA Works Best For...

• Big Corporations
• Maturing Companies with little expected growth.
• Firms with little ability to change their capital
  structure.
• Firms that experience little deviation from their
  expected return (Ke).

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The Bad

• The PV of Future EVAs is a more important measure
  than EVA itself
• EVA is not entirely True Profit
• EVAs Limitations

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PV of EVA v. EVA

• EVA is year to year changes in value. If
  managers only concentrate on increasing EVA as
  much as they can in the short term, they may
  overlook potential projects that yield higher EVA
  in the long term.

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EVA is not a complete measure of true
profitability

• There are no standardized EVA components. Each
  firm may consider financial statement items
  differently.
• EVA calculations are based on book value of
  assets.

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EVAs Limitations

• Even positive EVAs can be misleading if they are
  not bench-marked against competitors with higher
  EVAs
• EVA is expensive
• EVA is not appropriate for small businesses and
  proprietorships.

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EVAs Limitations e.g.

• Exp. NOPAT 150
• WACC 12
• Total Cap (IC) 1000
• Exp. EVA 30
• If Act. NOPAT 130, then Act. EVA 10
• Previous MV would have reflected a 30 EVA, but
  only a 10 EVA was achieved so current stock
  price would fall.

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The End