The Economic Value Added Model (EVA) - Financial Analysis for Managers

Economic Value Added Model (EVA)

The method has become popular since the 1980s. Invented by B. Stewart and D. Stern and patented by Stern Stuart & amp; Co.

The economic added value reflects the amount of net profit that can be divided between shareholders after paying taxes and expenses for raising capital. The most important advantage of the company's assessment based on EVA is the combination of financial and operating results in this indicator.

The original EVA formula looks like this:

where IORAT is the operating profit after taxes (EB1T o (1-0);

1ULSS - weighted average cost of capital; 1C - invested capital.

The invested capital in the methodology EVA is the capital invested in assets to support the company's operational activities. This value is calculated as the difference between the carrying amount of total assets (at the beginning of the period) and the amount of interest-free short-term liabilities, or as the amount of equity and long-term liabilities.

This is the so-called operational approach to the EVA calculation.

There is also a financial (economic) approach. EVA is calculated using the formula of the operational approach by dividing the profit NOPAT by WACC. As a result, the return on invested capital ROIC:

appears

The product WACC o 1C is also called the cost of capital.

However, an absolute measurement of EVA is not enough to match a company. Therefore, a relative EVA is used. As EVA is an indicator that measures the effectiveness of an investment, it is necessary to compare EVA with respect to the amount of invested capital (C /). Thus, we obtain an expression for the standardized EVA:

By dividing both parts in the EVA formula by/C, we get the following expression:

Thus, the main idea of ​​the EVA method is: the company has value to the owner only if EVA & gt; O, i.e. if the return on invested capital exceeds the cost of capital:

The value of the spread is the basis for measuring the profitability of capital, adjusted for the amount of risk. With the help of this indicator you can compare companies, different by: categories (small/medium); capital-labor ratio; capital structure; degree of risk.

It should be noted that the EVA for one period is not very informative in itself. Therefore, it is necessary to consider it in time. For this purpose, the indicator of the added value added is used. as the value of the company, the sum of the discounted added values ​​for all forecasting periods is considered.

EVA is an indicator that is based on an attempt to overcome traditional accounting problems. However, since the data for the calculation is taken from the accounting records, data conversion problems can still occur in this method.

In order for the indicator EM4 to measure the net economic profit for the company's owners, it is not possible to replace the operating profit after paying taxes NOPAT by the result of the production activity on the balance sheet, and the invested capital by the sum of assets from balance. This leads to the fact that the indicator EVA there are shortcomings inherent in the classic indicators of profitability. Therefore, we recommend that you use EVA to translate accounting data into economic indicators.

For this purpose, the authors of the model of EO D. Stern and B. Stewart determined the list of amendments to accounting data, which counts up to 154 articles, but only 10-12 of them are proposed to be used in practice. The full list of amendments is the authors' trade secret.

EVA is one of the most popular and frequently used options within the framework of value added theory. Other variations are market value added (MBA), shareholder value added (SVA), total value added (TVA).

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