30 December 2012
MEANING: EVA is the Surplus generated by an entity after meeting an equitable charge towards the providers of capital. USES: EVA helps to – Measure the financial performance. Take important managerial decisions. Equate managerial incentives with shareholder’s interest. Improve financial & business literacy throughout the firm.
CONCEPT OF EVA: Excess of returns over cost of capital. Measures whether operating profit is sufficient enough to cover cost of capital. If a company EVA is negative – Firm is destroying shareholders wealth even though it may be reporting positive and growing EPS or ROCE. Shows whether company is creating real value for its shareholders or not. Capital Asset Pricing Model (CAPM) is used to calculate EVA. EVA expressed in terms of Rupee (figures) and not in percentage.
LIMITATIONS OF EVA: Not easy to use. Too complicated for small business. Recommends inexpensive debts in order to reduce cost of capital. A passive tool, measures past performance.
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