BENNET STEWART shows us a method measuring the value of a company in any given year with a concept he calls ECONOMIC VALUE ADDED or EVA. EVA is basically the difference between the operating profit and the cost of capital employed. Any year that a company is in business and generates more operating profit than its capital charge, it is creating economic value. By discounting this spread, taking the present values of all future EVA's at the rate of the cost of capital employed, you get the cumulative present value of all future EVA's. Add this to the current capital and you derive the value of a company.
EVA incorporates a thinking about financial structures that also facilitates a better understanding of the mechanics in a balance sheet and P&L . Pure cash flow analysis will miss crucial opportunities by disregarding companies with negative cash flows. most impottantly, EVA gives you a very handy set of tools to understand and question management's action and value its progress year by year.
EVA is a managerial accounting concept that considers how well a business is performing by, among other things, deducting the firm's capital costs from its profits. what is left is known as eva, as opposed to the familier accounting profit that on corporate income statements and some believe this better suggests how well the company is using capital to build economic value.
Managers, in turn, use this information to deploy corporate resource in ways that enhance economic value.
Economic value based strategic planning techniques, which tie business level competitive strategies to the corporation's stock price, have achieved increasing recognition among financial managers. these models evaluate business strategies in terms of their ability to create value for the shareholders and attempt to ensure that business level competitive strategies are related to the fundamental objective of maximizing the return to the company's shareholders.
Interest in economic value creation is intertwined with a number of other popular management practices and trends related to competitive strategy and information technology. Specifically, improved access to detailed operational data has corporate executives to focus on very precise value related targets, be they cost, be they cost reduction, new investment or other resource allocation decisions. A supporting trend has been the popularity of so called activity- based costing and activity based management, which juxtapose the value of each step in a manufacturing or service process with its costs. this information, coupled with overall strategic objectives, allows companies to focus on activities that create the most value and conversely. to avoid devoting inordinate amounts of resources to activities that produce little value. such efforts are by no means synonymous with economic profit, but like it, they are concerned with maximizing returns on resources and can in fact lead to greater economic profit.
However there is no single definition of what constitutes economic profit or how it should be figured; for large corporations, in particular, it remains somewhat of an abstraction that cannot be computed as easily as, say net income. Perhaps the best known technique is economic value added, which was developed by the consulting firm Stern Stewart & co. indeed, Stern Stewart has claimed a trademark on the acronym, prompting other agencies to devise new names like "economic value management" for essentially the same methods. According to the EVA approach, managers should be evaluated by the economic returns they generate for shareholders. Strategies that are expected to create the greatest sustainable competitive advantage are those that also generate the largest value for the firm's shareholders. Only investments providing positive economic return should be undertaken. Positive economic returns are generated when the returns on an investment are greater than the market cost of capital. the market cost of capital reflects what the business could earn on an investment of similar risk.
EVA incorporates a thinking about financial structures that also facilitates a better understanding of the mechanics in a balance sheet and P&L . Pure cash flow analysis will miss crucial opportunities by disregarding companies with negative cash flows. most impottantly, EVA gives you a very handy set of tools to understand and question management's action and value its progress year by year.
EVA is a managerial accounting concept that considers how well a business is performing by, among other things, deducting the firm's capital costs from its profits. what is left is known as eva, as opposed to the familier accounting profit that on corporate income statements and some believe this better suggests how well the company is using capital to build economic value.
Managers, in turn, use this information to deploy corporate resource in ways that enhance economic value.
Economic value based strategic planning techniques, which tie business level competitive strategies to the corporation's stock price, have achieved increasing recognition among financial managers. these models evaluate business strategies in terms of their ability to create value for the shareholders and attempt to ensure that business level competitive strategies are related to the fundamental objective of maximizing the return to the company's shareholders.
Interest in economic value creation is intertwined with a number of other popular management practices and trends related to competitive strategy and information technology. Specifically, improved access to detailed operational data has corporate executives to focus on very precise value related targets, be they cost, be they cost reduction, new investment or other resource allocation decisions. A supporting trend has been the popularity of so called activity- based costing and activity based management, which juxtapose the value of each step in a manufacturing or service process with its costs. this information, coupled with overall strategic objectives, allows companies to focus on activities that create the most value and conversely. to avoid devoting inordinate amounts of resources to activities that produce little value. such efforts are by no means synonymous with economic profit, but like it, they are concerned with maximizing returns on resources and can in fact lead to greater economic profit.
However there is no single definition of what constitutes economic profit or how it should be figured; for large corporations, in particular, it remains somewhat of an abstraction that cannot be computed as easily as, say net income. Perhaps the best known technique is economic value added, which was developed by the consulting firm Stern Stewart & co. indeed, Stern Stewart has claimed a trademark on the acronym, prompting other agencies to devise new names like "economic value management" for essentially the same methods. According to the EVA approach, managers should be evaluated by the economic returns they generate for shareholders. Strategies that are expected to create the greatest sustainable competitive advantage are those that also generate the largest value for the firm's shareholders. Only investments providing positive economic return should be undertaken. Positive economic returns are generated when the returns on an investment are greater than the market cost of capital. the market cost of capital reflects what the business could earn on an investment of similar risk.
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