Economic value added and its application in business analysis

Economic Value Added (EVA): A New Flexible Tool for Measuring Corporate Performance" by Girotra and Yadav (2001), the authors address the issue of Economic Value Added, and its benefits for determining the cumulative value of a business. According to the authors, EVA represents a new tool that managers can use to determine corporate performance and the true value gained by shareholders. The article then proceeds to analyze the EVA tool in comparison with other measures already in use, including Return on Investment (ROI), Return on Equity (ROE) and Earnings per Share (EPS).

The premise of the article is that EVA contributes an additional measure of value in terms of corporate performance, which other measures do not. A further point is that EVA is not a wealth creating tool, but rather inspires managers to implement wealth creating measures by indicating the performance of the company. The information is well-structured in order to provide well-grounded reasons for the claims the authors make.

According to the authors, the main reason for the applicability of EVA in the current business world is a conglomeration of various factors. These include the easy availability of capital, the flow of information, life cycle inflections, and the volatility created by changes in exchange rates and costs. The actual profit of a company in dollar terms as compared to the initial investment is therefore not always clear. EVA provides this clarity.

The article is structured in a comparative framework. The authors for example provide brief but detailed descriptions of the conventional accounting measures, with the reasons for their inadequacy in terms of determining value. In today's volatile business world, value is of utmost importance, particularly in terms of investments. Investors are concerned with knowing the value of a company before making the decision to invest. Companies in turn are obliged to keep a close eye on value and its creation in order to maintain a good relationship with their investors.

EVA is based upon the advantage that shareholders gain from investing in the company. Items such as interest bearing debt, equity capital, and net operating profit are taken into account when calculating EVA. Shareholders require returns that compensate their risks when investing in the company in the first place. If the company cannot demonstrate a value of return, then it is in effect operating at a loss. Hence, EVA has been implemented by several companies in order to provide shareholders with value that will ensure their loyalty to these companies.

After explaining the basic concepts, the article continues to demonstrate these by means of a company case study. Factors such as production, earnings, and capital investments are taken into account. A description of the company is followed by detailed calculations to arrive at the company's EVA.

I believe that the article was extremely well written for a number of reasons. Firstly, it clearly explicates all the concepts involved in quantifying a company's accounting strategies. Being the main subject of the article, EVA enjoys most of the spotlight in this regard. The other factors are compared with EVA in order to reveal their shortcomings. One improvement that could be suggested is that the strengths of factors such as ROI and ROE could also be included in the descriptions. The absence of these however does not detract from the general value of the article, or from the proof of the premise. Furthermore, it could also be acknowledged that the factors described, other than EVA, are already well-known in accounting, and do not need a clear explication of both strengths and weaknesses.

Another factor in favor of the article and its premise is the fact that the authors acknowledge the shortcomings of EVA itself. The article for example includes a "Limitations" section that address these limitations. EVA for example does not take into account the current market value of assets, which could be misleading. Hence, it is difficult for EVA to project the future success of strategic goals and plans. Other factors such as market share and sales growth could better determine such future success. Furthermore, EVA only provides a global, one-year view of the operational performance of a company, which could be further misleading in terms of true value and performance throughout the year.

The fact that these shortcomings are taken into account provides a somewhat balanced view of the issue. In addition, the authors emphasize that EVA is best used with other, more traditional measures in order to provide an accurate measure of its value.

I agree that EVA is an extremely valuable and flexible tool for corporate managers and shareholders alike. Both managers and shareholders have a concern regarding the value of the company involved. The more actual profit that a company makes for example, the greater its value and the more benefit for all employees and shareholders involved.

In addition to its actual value in determining profit and value, EVA is also useful in terms of managerial skill. It provides managers with a drive to create value and wealth, as these are clearly visible when implementing EVA. In this way, the concept provides a platform for the implementation of better decision making and long-term thinking. By indicating value drivers and value destroyers, EVA can also be used as a tool for better company management in order to create value throughout the various departments within the company.