Performance – An EVA
Approach
If EVA is
+Ve = Firm is creating shareholder’s wealth
-Ve = Firm is destroying shareholder’s wealth
Computation of NOPAT
Profit after tax but before Interest
+ Increase to Deferred Taxes
+ Goodwill Amortized in Current year
+ Increase to Net Capitalized
Intangibles
+/- Unusual loss or (Gains) net of tax
N. B: Some 144 adjustments are there
Implementation of EVA
zMeasurement
zManagement System
zMotivation
zMindset
Key Strategies to Enhance EVA
z Operate: Set targets to Improve ROCE.
z Build: Invest capital only when return
exceeds the cost of the capital.
z Divest: Divest capital when return fail to
achieve cost of capital.
z Optimise: Restructure capital to reduce
the cost of the Capital.
EVA Determination – A Case Study
B = Covariance of Rm & Rf
Variance of Rm
EVA of NTPC
z EVA = 6,500 – 0.254 ( 20,000 )
= 6,500 - 5080
= Rs 1420 Cr EVA
A positive EVA indicates that this
company creates value. It helps
managers to create value for share
holders.
Strategies for increasing EVA
z Increase the return on existing project.
z Invest in new projects that have a return
greater than the cost of capital..
z Use less capital to achieve the same
return.
z Reduce the cost of capital.
z Curtail further investment in sub-standard
operations where inadequate returns are
being earned.
EVA Deficiency
z Not easy to use (for calculation of PAT,
some 144 adjustments are there) too
complicated for small business.
z Recommends inexpensive debts in order
to reduce cost of capital (COC), is a very
questionable strategy for small business.
z A passive accounting tool : measures past
performance.
Inference
z Thus, A company must strive continuously
to increase not only profitability but also
the EVA.
z EVA reflects high net worth of the
company, thus it’s credibility increases.
z In India, Companies like Dr. Reddy’s Lab,
WIPRO, INFOSYS are coming up with their
respective EVAs along with their Annual
Report.