Economic Value Added

Economics value added is a powerful new management tool which is considered to be important source of corporate governance. It is an alternate performance measurement technique which is used to overcome the limitation of traditional measurement criteria by correlating with shareholder’s wealth and action of a company’s manager. Various performance measurement criteria have been adopted by corporate entities, among them return on investment is considered to be an important tool for determination of profitability. The main aim of every corporate management is to maximize its shareholder’s value and value of business. From past few years EVA has emerged as a new way to measure financial performance of highly reputed corporation like Coca-Cola, AT&T, Quaker, Oats and Briggs and Stratton have set up EVA measurement system throughout their organization. Economic value added is considered to be tool for measuring corporate performance not only for evaluating performance of companies out also for determination of incentive pay. It tries to cope with the tension that exists between the need to come up with a performance measure which is correlated with shareholder’s wealth and at the same time less subject to random fluctuations in stock prices. EVA is a rupee amount rather than a ratio remaining after capital charge or cost of capital is deducted from the amount of operating profits. EVA model indicates that EVA is net result of excess of risk adjusted cost of capital employed to generate cash flows. Estimation of stock market data represented in calculating EVA does not form a part of standard accounting principles. So EVA is a way of measuring an operation’s real profitability. It holds a concern accountable for the cost of capital it used to expand and operate its business. It is better than traditional method as it encourages growth through investment in new products, management and shareholders. EVA is linked with bonus to employees, remuneration to management, and bonus share to equity shareholders.

Dr. Pawan Kumar Patodiya
Associate Professor, Deptt. of Comm. & Mgmt.