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Economic Value Added,has become a much discussed and increasingly widely used corporate performancemeasure. Briefly outline the key elements of the measure and criticallyconsider why its use has spread in the corporate sector in the recent years and...

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Introduction

Economic Value Added, has become a much discussed and increasingly widely used corporate performance measure. Briefly outline the key elements of the measure and critically consider why its use has spread in the corporate sector in the recent years and whether that has advantaged investors and/or managers. In this essay I intend to firstly elucidate what Economic Value Added (EVA) is and where it came from. Then I will attempt to identify the key elements used within the measuring system. Following this, I will explain why its spread has become popular in recent years with both corporations and investors. I will then explain both the short and long-term benefits of the EVA system for both investors and corporations. EVA is the trademark of the Stern Stewart consulting organisation. The EVA system was developed by the above-mentioned consulting organisation during the 1990's. EVA is basically a different way of measuring a firm's residual income. Stern Stewart developed a system by which if the existing and future accounting data were calculated in a different manner then the firm could be shown to be making different (usually better) ...read more.

Middle

This system allows management to see clearly how they are performing and, theoretically, it should motivate them to work harder and thus achieve greater shareholder wealth in any publicly traded company. Put in simpler terms it is an estimate of the "ECONOMIC" profit not of the "ACCOUNTING" profit in comparison to the required minimum rate of return, which the shareholders could get when, comparing them to other investments that would have comparable statistically calculated risk values. Thus, it can be seen that EVA is a powerful and useful tool for shareholders, and potential investors. EVA helps establish the differences between those businesses that seem to make conventional accounting profit from those that seem to make an accounting profit. Ray Kroc eloquently illustrated this point in his book Grinding It Out. The founder of McDonalds said, "Until the business returns an income greater than the capital outlay, we are running at a loss. It is irrelevant if we pay taxes. The aim of the expansion is to strategically deploy the capital in creating an infrastructure that when all the expansion plans are met, we deliver stable profitability to other investors" EVA is recognised as substantially outperforming its competing performance related measures. ...read more.

Conclusion

The system is only really useful for quick pay back projects so people wanting to take on a more long-term one would be at a disadvantage, as they would in effect be working blindly. The EVA measurement system acts as a good way for prospective shareholders to assess whether it is worth investing in a particular company or not. For example, GlaxoSmithKline PLC has an EVA value of 5,061,506,912 whilst the EVA value for Vodafone Airtouch PLC is merely -13,371,636,840 (figures taken from www.cbsmarketwatch.com ). If you were to compare these two figures as a reflection upon the companies Vodafone would be a bad company to invest in. As Howard Shultz the CEO of Starbucks said "The aim of a good CEO is to always deliver more than you promise, otherwise they kick you out" In conclusion, EVA is a very useful "TOOL" for both investors and management alike, but it is only a tool and for maximum results it must be used in conjunction with other methods and systems to create the most valid long-term and short term delivery of value to stock holders/investors. It is no good to implement a system to meshed performance or ROI ext if the fundamentals of the firm are unstable. ...read more.

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