The EVA concept is criticized for following reasons:
.EVA ignores inflation and it is based against new assets. Whenever a new investment is made, capital charge is on the full cost initially, So EVA figure is low but as the depreciation is written off, the capital charge decreases and hence EVA goes up. This problem exists with measures like ROI also.
. Since EVA is measured in rupee terms it is biased in favour of large, low return businesses. Large businesses that have returns only slightly above the cost of capital can have higher EVA than smalles businesses that earn returns much higher than the costs. This makes EVA a poor metric for comparing businesses.
.EVA ignores inflation and it is based against new assets. Whenever a new investment is made, capital charge is on the full cost initially, So EVA figure is low but as the depreciation is written off, the capital charge decreases and hence EVA goes up. This problem exists with measures like ROI also.
. Since EVA is measured in rupee terms it is biased in favour of large, low return businesses. Large businesses that have returns only slightly above the cost of capital can have higher EVA than smalles businesses that earn returns much higher than the costs. This makes EVA a poor metric for comparing businesses.
In the short term, EVA can be improves by reducing assets faster than the earnings and if this is pursued for long it can lead to problems in the longer run when new improvements to the asset base are made. The new investments can have a high negative effect on EVA because the asset base would have been reduced to a large extent and improvements will involve huge investments.
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