Economic Value Added (EVA) Model
The method has become popular since the 1980s. Invented by B. Stuart and D. Stern and patented by Stern Stuart & Co.
Economic value added reflects the amount of net profit that can be divided among shareholders after taxes and capital raising costs. The most important advantage of valuing a company based on EVA - combining the results of financial and operating activities in this indicator.
Original formula EVA as follows:
Where IORAT - operating profit after taxes (EB1T o (1-0);
1УЛСС - weighted average capital costs; 1C - invested capital.
Invested capital in methodology EVA - is capital invested in assets to ensure the operational activities of the company. This value is calculated as the difference between the balance sheet value of total assets (at the beginning of the period) and the value of non-interest-bearing short-term liabilities, or as the sum of equity capital and long-term liabilities.
This is the so-called operational approach to calculation EVA.
There is also financial (economic) approach. Calculation EVA carried out according to the formula of the operational approach by dividing profits NOPAT on WACC. The result is a return on invested capital indicator ROIC:
Work WACC o 1C also called cost of capital.
However, the absolute measurement EVA not enough to compare companies. Therefore, relative is used EVA. Because the EVA - this is an indicator that evaluates the effectiveness of investments, compare EVA necessary relative to the amount of invested capital (C/). Thus, we obtain an expression for the standardized EVA:
Dividing both sides in the formula EVA by /C, we get the following expression:
Thus, the main idea of the method EVA is as follows: a company is valuable to the owner only if EVA > Oh, that is. if the return on invested capital exceeds the cost of capital:
The cost spread serves as the basis for measuring risk-adjusted return on capital. Using this indicator, you can compare companies different by: category (small / medium); capital ratio; capital structure; degree of risk.
It should be noted that the indicator EVA for one period in itself is not very informative. Therefore, it is necessary to consider it in time. For this purpose, the indicator of present value added is used, i.e. The value of the company is considered to be the sum of discounted added values for all forecasting periods.
EVA is an indicator that is based on an attempt to overcome traditional accounting problems. However, since the data for the calculation is taken from the financial statements, data conversion problems may still arise in this method.
In order for EM4 to measure the net economic profit for a company's owners, after-tax operating profit cannot be substituted. NOPAT the result of production activities on the balance sheet, and invested capital is the amount of assets from the balance sheet. This leads to the fact that the indicator EVA disadvantages inherent in classical profitability indicators appear. Therefore, it is recommended to use the indicator EVA translate accounting data into economic indicators.
For this purpose, the authors of the EO model, D. Stern and B. Stewart, have identified a list of adjustments to accounting data, which includes up to 154 items, but only 10-12 of them are proposed to be used in practice. The full list of amendments is a trade secret of the authors.
EVA - this is one of the most popular and frequently used options within the framework of the theory of value added assessment. Other variations are Market Value Added (MBA), Shareholders Value Added (SVA), and Total Value Added (TVA).
Federal State Educational Institution of Higher Professional Education Financial Academy under the Government of the Russian Federation (FINACADEMY)
Department of Valuation and Property Management
Abstract on the topic:
"Economic added value
( EVA )»
Performed : student of FM group 4-2
Kalabashkina E.
Scientific supervisor: Tulina Yu.S.
Moscow
Introduction
In the 1970s - 1980s, companies in developed countries arose the question of developing a new financial management mechanism. This was explained by the fact that the methods of assessing the company’s activities that existed before that time could no longer meet the growing requirements of managers, since they did not allow assessing the company’s activities in the long term. In addition, investors began to demand from company management a constant increase in the value of the company - an indicator reflecting the level of well-being of shareholders.
The concept of economic value added (EVA™), developed in the USA in the 80s of the last century, solved the problems posed. Based on the principle of economic profit, the EVA indicator could be used to determine value, as well as to characterize the long-term activities of the company.
This concept quickly began to be used by leading American companies, such as Coca-Cola, General Electric. Soon, their experience began to be adopted by companies (including small ones) in other countries.
Russia currently has the opportunity to borrow the most advanced foreign technologies and business methods, which always gives the “catching up” country an advantage over the “overtaking” one. In this regard, it is important for domestic companies to immediately implement and use advanced management mechanisms. The use of the concept of economic added value, which is one of the advanced concepts of financial management, will allow domestic firms to increase operational efficiency and reduce the gap with foreign competitors.
Despite the positive experience of use abroad, the concept of economic added value is currently little used by Russian companies. The main reason for this is the complexity of its application “in its pure form” in the Russian economy. Accordingly, determining the possibility and developing mechanisms for using the concept of economic added value in the financial management of Russian companies is an urgent task of financial science.
The object of this study acts as a process of financial management of a company.
Subject of study– company financial management mechanisms based on the concept of economic added value.
Theoretical and methodological basis of the study composed primarily of works by foreign specialists in the field of corporate finance, valuation, company value management and, in fact, the concept of EVA.
Among the classic works of finance theory, the works of F. Modigliani, M. Miller, E. Fama and W. Sharp, S. Ross, S. Pratt should be highlighted.
Of the works devoted to the concept of EVA, first of all, it should be noted the work of its author B. Stewart “The Quest For Value: a Guide for Senior Managers”, as well as the book by D. Young and S. O’Byrne “EVA and Value-Based Management: a Practical Guide to Implementation". Among the empirical works that examine the results of implementing EVA in practice, it is worth highlighting the works of S. Weaver, G. Biddle and R. Bowen.
In the 70-90s, two concepts for assessing the cost and efficiency of enterprises appeared, among which the most popular in recent years are balanced scorecard(BSC) and economic added value(EVA).
Development of a paradigm for determining the cost and efficiency of a company
| 1920s | 1970s | 1980s | 1990s |
· Du Pont Model; Return on Investment (ROI) |
· Net earnings per share (EPS); · Ratio of share price and net profit (P/E) |
· Ratio of market and book value of shares (M/B); · Return on equity (ROE); · Return on net assets (RONA); · Cash Flow |
· Economic value added (EVA); · Earnings before interest, taxes and dividends (EBITDA); · Market value added (MVA); · Balanced Scorecard (BSC); · Total shareholder return (TSR); Cash flow return on invested capital (CFROI) |
2. Economic value added (EVA): essence, formula for calculation, meaning.
In Russian-language economic literature, the concept of EVA is considered only in individual works, almost exclusively in translations. EVA - an important financial indicator - relatively recently (in the early 90s of the last century) began to be actively used by many corporations in the USA and some other countries (for example, let's name AT&T, QuarkerOats, Briggs & Stratton, Coca-Cola).
Economic value added ( EVA) represents the enterprise's profit from ordinary activities minus taxes, reduced by the amount of payment for all capital invested in the enterprise.
The indicator is used to assess the efficiency of an enterprise from the position of its owners, who believe that the activity of the enterprise has a positive result for them if the enterprise managed to earn more than the return on alternative investments. This explains the fact that when calculating EVA, not only the fee for using borrowed funds, but also equity capital is deducted from the amount of profit. It can be argued that this approach is more economic than accounting.
The author of the concept of “economic added value” D.B. Stewart defined this indicator as the difference between net operating income and cost of capital, i.e. E V.A. allows you to estimate the real economic profit at the required minimum rate of return.
Economic value added is an indicator of the annual profitability of an enterprise, which primarily shows shareholders whether the enterprise has managed to create additional value. EVA can also serve as a goal for senior management and be used in a motivation system.
Logic of the indicator EVA is as follows: Net operating income after taxes is the income received after subtracting expenses and depreciation. Part of this income goes to pay the costs of using resources (expressed in the costs of equity and borrowed capital), and the other part is the created value, which is measured by E V A. This concept is based on the fact that it is not enough for a company to have a positive financial result or an acceptable level of income per share; any economic unit during the course of its economic life must reach a level of development at which it is possible to create new value. And it is created only when the company receives a return on invested capital that exceeds the cost of raising capital.
Economic added value is calculated using the formula:
| EVA = NOPAT - Capital = NOPAT - WACC * C.E. |
EVA ( Economic Value Added ) - economic added value.
NOPAT ( Net Operating Profit After Tax ) - net profit received after paying income tax and minus the amount of interest paid for the use of borrowed capital. That is, this is net profit according to the financial statements (according to the Profit and Loss Statement) taking into account the necessary adjustments.
Capital ( Cost Of Capital ) - the total cost of capital of the company (consists of equity and debt capital, measured in absolute units).
WACC ( Weight Average Cost Of Capital ) - weighted average cost of capital (measured in relative terms - in %), this is the cost of total capital (equity and debt).
C.E. ( Capital Employed ) - invested capital. Represents capital, determined taking into account the cost of resources not included in the balance sheet. Calculated by adjusting financial reporting data.
Cost of invested capital ( C.E. ) is calculated using the formula:
C.E. = T.A. – NP , Where
T.A. ( Total Assets ) - total assets (balance sheet),
NP ( Non Percent Liabilities ) - non-interest-bearing current liabilities (on the balance sheet), that is, accounts payable to suppliers, the budget, advances received, other accounts payable.
Weighted average cost of capital ( WACC ) is calculated using the formula:
WACC = Ks *Ws+ Kd * Wd * (1 - T), Where
Ks- cost of equity (%),
Ws- share of equity capital (in%) – on the balance sheet,
Kd- cost of borrowed capital (%),
Wd- share of borrowed capital (in%) – on the balance sheet,
T- income tax rate (in%)
Cost of equity ( Ks ) is calculated using the method CAPM :
Ks = R + b * (Rm - R) + x + y + f, Where
R- risk-free rate of return (for example, deposit rate) (%),
Rm- average return on shares on the stock market (%),
b- beta coefficient, which measures the level of risk,
x- premium for risks associated with insufficient solvency (%),
y- premium for the risks of a closed company associated with the unavailability of information about the financial condition and management decisions (%),
f- country risk premium (%).
Cost of borrowed capital ( Kd ) is calculated using the formula:
Kd = r * (1 - T ), Where
r- annual interest rate for the use of borrowed capital,
T- income tax rate.
From the formula for economic added value, a relative indicator can be derived "Return on invested capital" ( Return on Capital Employed , ROCE ). The economic meaning of this indicator is that economic value added (EVA) arises in the company if, over a given period of time, it was possible to earn a return on invested capital (ROCE) higher than the investor's rate of return (WACC).
Investors (owners, shareholders) will not consider themselves satisfied if the return on their capital earned in the company does not reach the barrier rate of return they set.
This principle of forming the value of a company is expressed in the indicator of economic value added (EVA):
| EVA = Spread * CE = (ROCE - WACC) * CE |
Spread– yield spread (difference) between the return on invested capital and the weighted average cost of capital. The spread represents economic value added in relative terms (in %).
Spread = ROCE – WACC
If Spread is positive, then the company has earned a return that exceeds the return required by investors. In this case, the return on capital invested in the company is higher than the alternative return for the investor, because all alternatives are assessed and taken into account in the weighted average cost of capital (WACC) indicator. Consequently, the final result - the emergence of economic added value means an increase in the value of capital for a given period.
ROCE (Return on Capital Employed)- Return on invested capital:
ROCE = NOPAT / CE
Essence EVA is manifested in the fact that this indicator reflects the addition of value to the market value of the enterprise and the assessment of the efficiency of the enterprise by determining how this enterprise is valued by the market.
Market value of the enterprise = net assets (at book value) + EVA future periods, reduced to the present time
The EVA value determines the behavior of the owners of the enterprise in relation to investing in this enterprise:
1. EVA = 0 , i.e. WACC= ROI and the market value of the enterprise is equal to the book value of net assets. In this case, the owner's market gain from investing in this enterprise is zero, so he wins equally by continuing operations in this enterprise or investing in bank deposits.
2. EVA >0 means an increase in the market value of the enterprise over the book value of net assets, which stimulates owners to further invest funds in the enterprise.
3. EVA <0 leads to a decrease in the market value of the enterprise. In this case, the owners lose the capital invested in the enterprise due to the loss of alternative profitability.
From the relationship between the market value of the enterprise and the EVA values, it follows that the enterprise must plan future EVA values to guide the actions of the owners in investing their funds.
The expectation of future EVA values has a significant impact on the growth of the company's share price. If expectations are inconsistent, the stock price will fluctuate, and in the short term it will not be possible to draw a clear relationship between EVA values and the company's stock price. Therefore, the task of planning profit, and with it planning the structure and price of capital, is the primary task of enterprise management.
The EVA concept is often used by Western companies as a more advanced tool for measuring the performance of departments than net profit. This choice is explained by the fact that EVA evaluates not only the final result, but also the price at which it was obtained (i.e., how much capital was used and at what price).
3. Ways to increase EVA:
1. Increase in profit while using the same amount of capital;
2. Reducing the amount of capital used while maintaining profits at the same level;
3. Reducing the cost of raising capital.
Separately, we can highlight the reduction of taxes and other obligatory payments within the framework of tax planning, using various schemes permitted by the legislation of the Russian Federation.
The identified ways to increase EVA are implemented in specific activities carried out by enterprises. If the EVA indicator is chosen by an enterprise as a criterion for assessing the effectiveness of its activities, then the task is to increase the value of this criterion. Such an increase occurs both as part of the reorganization of the enterprise and as part of current management activities.
Activities aimed at increasing the efficiency of the enterprise
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In general, to summarize, we can outline the role played by the indicator of economic added value in assessing the efficiency of an enterprise:
· EVA acts as a tool that allows you to measure the actual profitability of an enterprise, as well as manage it from the position of its owners;
· EVA is also a tool to show plant managers. how they might affect profitability;
· EVA reflects an alternative approach to the concept of profitability (a transition from calculating return on invested capital (ROI), measured in percentage terms, to calculating economic value added (EVA), measured in monetary terms);
· EVA acts as a tool for motivating enterprise managers;
· EVA improves profitability primarily by improving the use of capital rather than by focusing its efforts on reducing the cost of capital.
Thus, it can be assumed that the use of the EVA indicator in management accounting will help improve the quality of assessing the performance of Russian enterprises.
The indicator of added economic profit can be increased by:
1. increasing the return on existing capital, which can be achieved by increasing prices or margins, increasing volumes or reducing costs;
2. growth in profitability, which can be achieved by investing capital in projects with growing profits and adequate expenditure of additional capital, while investments in working capital and production capacity may be required in order to increase sales volumes, promote new products or develop new markets;
3. optimization of investments, which can be achieved through rationalization, liquidation or reduction of investments in operations that cannot provide a return on the cost of capital;
4. optimizing the cost of capital, which can be achieved by reducing capital costs, while maintaining the financial flexibility necessary to implement the strategy of using debt, management risk and other financial instruments.
Thus, you can increase added economic profit in three ways - increase profit using the same amount of capital; reduce the amount of capital used while maintaining profits at the same level; and reduce capital raising costs.
The concept of managing the value of a company based on the economic value added method suggests using the economic value added (EVA) indicator as the main criterion for assessing the company’s activities.
The goal of value management is to maximize the value of the company through the continuous growth of economic value added (EVA). And the way to manage value is to manage the factors that influence the value of the company.
A company's performance is influenced by a huge number of different factors. They can be classified as external and internal environmental factors (that is, macro- and microeconomic factors). The former influence the company's performance from the outside, the latter from the inside.
Internal factors affecting the cost may include:
· Growth rate of sales of company products/services
· Growth rates of main items of the Balance Sheet and Profit and Loss Statement
Net profit growth rate
· Rate of return of the owner (shareholder, investor)
· Other factors
External factors affecting the cost may include:
· Level of investment, marketing, financial, production and organizational risks of the company
· Change in the cost of borrowed capital (interest rate on loans)
· Changes in tax rates
Economic value added is an important economic indicator that characterizes the efficiency of using the capital of an enterprise, adding to the market value of the enterprise. Economic value added is real economic income, calculated based on the difference between the profit earned and the profit required by the owner, determined using the cash method of accounting for income and expenses.
Economic value added, economic profit and other indicators of residual profit have clear advantages over accounting profit as a criterion for assessing performance.
EVA serves as a constant reminder to managers: invest if and only if the return on investment is sufficient to offset the cost of capital. Managers accustomed to focusing on accounting profits or profit growth find this “signal” relatively easy to pick up. The EVA criterion can be used to support incentive and reward systems suitable for all levels of the organization, right down to the very bottom. For senior management, such systems can replace careful monitoring. With EVA-based compensation systems, management will no longer have to tell lower-level managers not to waste capital and then check whether they follow this order. Using EVA involves delegating authority and responsibility.
EVA gives managers visibility into their cost of capital. A plant manager can improve EVA in two ways:
1) increasing profits;
2) reducing the capital involved.
Because of this, the manager has an incentive to get rid of underutilized assets or transfer them to other hands. Working capital may also decrease.
The indicator of economic added value has a number of disadvantages: this indicator does not reflect the forecast of future cash flows and, therefore, the present value. In contrast, EVA is determined only by the current year's profit. Accordingly, it encourages managers to pursue projects with quick returns and discourages projects that begin to pay off later. Similar problems arise when launching a new risky enterprise, when huge capital investments are required, and profits in the first years are low or even negative. Moreover, this does not equate to a negative net present value, since later profits and cash flow will increase significantly. But at the initial stage, economic value added will be negative, even if the project is predicted to have a high positive net present value by all parameters.
Among the disadvantages of the concept are the following:
· the EVA indicator does not take into account differences in the size of the companies under study;
· EVA calculation is based on accounting indicators;
· the EVA indicator does not reflect the causes of possible problems in the company's activities.
The ability to calculate EVA not only when evaluating an investment project, but also as an indicator of a company’s performance for any period is its significant advantage compared to traditional indicators such as income or profitability. This advantage is due to the fact that the EVA concept is based on an integrated approach to three main areas of management:
· preparation of capital budget;
· assessment of the performance of departments or the company as a whole;
· development of an optimal fair bonus system for management.
The advantages of applying the concept in the first two areas are associated with an adequate and non-labor-intensive determination of the degree to which a division, firm or individual project has achieved the goal of increasing market value.
Unfortunately, most companies use traditional performance indicators, namely: profit and marginal profit, sales volumes, income, etc., which can show a distorted picture of the company’s state from the perspective of its “health” over a long period.
Conclusion
Regardless of the size of the company, continued creation of value for investors is the main goal of all business organizations, therefore, an objective assessment of the effectiveness of investments is no less important.
Today, EVA is the most accurate way to assess a company's performance. It is even more accurate than traditional profit measures because it includes the present value of capital.
In most cases, the use of EVA is the first step towards the implementation of a system of continuous improvements and the subsequent use of modern management tools.
Bibliography
1. Osipov M.A. Using the concept of economic added value to improve efficiency and measure company performance // History of management thought and business. VI International Conference “Problems of Measurement in Organizational Management”. Moscow, June 23-25, 2007 / Ed. IN AND. Marsheva, I.P. Ponomareva. – M.: MAKS Press, 2007. – P. 98-103.
2. Osipov M.A. Modern mechanisms of enterprise management and measurement of its activities // Finance: Collection of articles. - M.: Sputnik + Company, 2008. – P. 95-126.
3. http://www.cfin.ru/management/controlling/evalution.shtmlEVAlution of the balanced scorecard Konstantin Redchenko, Ph.D., Associate Professor, Lviv Commercial Academy
4. http://1fin.ru/?id=185
L.I. Schneider Kuban State University
5. Damodaran A. Investment assessment. Tools and techniques for assessing any assets / A. Damodaran: Trans. from English M.: Alpina Business Books, 2005.
6. Teplova T.V. Investment levers for maximizing company value. Practice of Russian enterprises. M: Vershina, 2007.
7. Copeland T., Murrin J. Company value: assessment and management. M.: Olympus-business. 1999.
8. D. Young, S. O'Byrne. EVA and Value Based Management. A Practical Guide to Implementation - McGraw-Hill – 2000, Chapter 1, 2, 6, 9
EVA™ is a registered trademark of the consulting company SternStewart & Co. Next is EVA.
Stewart B. The Quest For Value: a Guide for Senior Managers. - New York: HarperCollins Publishers, 1991.
Http://www.cfin.ru/management/controlling/evalution.shtml
EVAlution of the balanced scorecard Konstantin Redchenko, Ph.D., Associate Professor, Lviv Commercial Academy
Http://www.finanalis.ru/litra/324/2293.html Economic added value Elena Larionova Consultant for financial analysis and planning at CG "Voronov and Maksimov", lecturer at the Faculty of Economics of St. Petersburg State University http :// www . vmgroup . ru /
Http://1fin.ru/?id=185L.I. Schneider Kuban State University
Economic Value Added (EVA) model. Its modifications to assess the value of the company in an “as is” standard and taking into account planned investments in the company’s fixed and working capital. Factors for managing company value (Value Drivers) in the EVA model.
Economic value added is an indicator of the company’s economic, rather than accounting, profit after paying all taxes and reduced by the amount of the fee for all capital invested in the enterprise.
There are two main schemes for calculating EVA :
1) EVA = NOPAT – WACC × CE
2) EVA = (ROIC – WACC) × CE
NOPAT – net operating profits after tax (net operating profits adjusted taxes);
WACC – weighted average cost of capital;
ROIC – return on invested capital;
CE – invested capital.
According to the EVA concept:
the value of the capital invested in the company is estimated
the assessment breaks down into an assessment of the market value of assets and the current value of the “economic profits” expected from them
“economic profit” - net operating income (NOPLAT) minus the cost of paying for the cost of capital used (Capital Charge)
Let's consider the following three options for the relationship between the value of the EVA indicator and the behavior of owners:
1) EVA = 0, i.e. The market value of the organization is equal to the book value of net assets. In this case, the owner's market gain from investing in this organization is zero, so he wins equally by continuing operations in this organization or investing in bank deposits.
2) EVA > 0 means an increase in the market value of the organization over the book value of net assets, which stimulates owners to further invest funds in the organization.
3) EVA< 0 ведет к уменьшению рыночной стоимости организации. В этом случае собственники теряют вложенный в организацию капитал за счет потери альтернативной доходности.
main idea and the economic meaning of the EVA indicator is that the organization's capital must work with such efficiency as to provide the rate of return required by the investor, shareholder or other owner on the invested capital.
Calculation algorithm indicator of economic added value: from net operating profit (NOPAT) the fee for the use of equity and borrowed capital is subtracted, the remaining amount is the created value, which is measured by EVA.
To calculate economic added value(EVA) the accounting indicator "Net profit" must be adjusted by the amount of so-called equity equivalents and adjustments to accounting indicators in terms of their market valuation:
EVA = NOPAT - Capital = NOPAT - WACC * CE, (9.8)
where NOPAT (Net Operationg Profit After Tax) is the net profit received after paying income tax and minus the amount of interest paid for the use of borrowed capital, that is, it is the net profit according to the financial statements (according to the Profit and Loss Statement), taking into account necessary adjustments;
Capital (Cost Of Capital) - the cost of capital of the organization;
WACC (Weight Average Cost Of Capital) - weighted average cost of capital (measured in relative terms - in %), this is the cost of total capital (equity and debt).
CE (Capital Employed) - invested capital, which is capital determined taking into account the cost of resources not included in the balance sheet, is calculated by adjusting financial reporting data by the amount of “owners' capital equivalents”.
WACC is an indicator that characterizes the cost of capital in the same way that the bank interest rate characterizes the cost of borrowing a loan. The difference between the WACC and the bank rate is that this indicator does not imply a straight-line payment, but instead requires that the investor's total present income be the same as what a straight-line interest payment at a rate equal to the WACC would provide.
Cost of capital invested (CE) is calculated according to the formula:
CE = TA – NP, (9.9)
where TA (Total Assets) - total assets (balance sheet);
NP (Non Percent Liabilities) - interest-free current liabilities (on the balance sheet), that is, accounts payable to suppliers, the budget, advances received, other accounts payable.
The weighted average cost of capital (WACC) is determined as follows:
WACC = Ks * Ws + Kd * Wd * (1 - T), (9.10)
where Ks is the cost of equity capital (%);
Ws - share of equity capital (in%) (balance sheet);
Kd - cost of borrowed capital (%);
Wd - share of borrowed capital (in%) (balance sheet);
T - income tax rate (in %).
Cost of equity and (Ks) can be calculated using the formula:
Ks = R + b * (Rm - R) + x + y + f, (9.11)
where R is the risk-free rate of return (for example, the rate on deposits of Russian banks of the highest reliability category), %;
Rm - average return on shares on the stock market, %;
b - beta coefficient, which measures the level of risks and makes appropriate adjustments and adjustments;
x - premium for risks associated with insufficient solvency, %;
y is the premium for the risks of a closed company associated with the unavailability of information about the financial condition and management decisions, %;
f - country risk premium, %.
First modification of the model involves calculating the cost “as is”, that is, without additional investments. This assumes that the business will continue its normal business activities with its existing assets.
K*=∑Act + PV (EVA), (1)
EVA = NOPLAT - ∑Act*WACCact (2)
PV (EVA) = EVA ,(3)
K* - market value of the enterprise (the property complex of the company or the entire capital invested in it);
∑Act - the total market value of the assets available at the enterprise;
PV (EVA) – current value of expected economic profits;
NOPLAT – net operating income minus tax burden
WACCact – actual weighted average cost of capital at the time of valuation;
WACC* - long-term weighted average cost of capital, based on its optimal structure (20% borrowed capital, 80% equity), as well as on the assumption that the cost of borrowed funds will reach the forecast value, based on the expected inflation rate and the average margin of banks .
Second modification of the modelEVA allows you to see the change in the market value of the enterprise in the influence of the project for the commercialization of intellectual property, but it does not require stopping the enterprise to modernize production assets for a new project. In this case, the model takes into account the investment of significant investments, which modify the formula for the expected average annual economic profit.
EVA = Ipl* (ROIC - WACCpl), where (4)
Ipl – planned investments in a project for the commercialization of RIA, which does not require stopping production;
ROIC – average annual planned return on invested capital;
WACCpl. – the weighted average planned cost of capital attracted to the project for the commercialization of intellectual property.
The return on invested capital indicator can be found using the formula:
ROIC = NOPLAT
From this formula it can be seen that the more valuable the RIA, the less new investments will be required in it and the more effective the additional investments will be, which will increase the ROIC indicator and the expected average annual economic profit.
When identifying key cost factors the company must be guided by the strategy and phase of the company's life cycle, the presence of potential for improving performance indicators.
As part of company value management, the main factors involved in formula calculation, can be detailed based on smaller components:
The main factors shaping EVA:
By increasing the value of EVA by influencing the factors involved in the model, the manager increases the value of the company.
EVA can be increased as follows:
Increasing business profitability by increasing sales income and reducing costs (saving and optimizing current costs (reducing unprofitable production, etc.)).
Optimization of capital costs.
Information sources:
to calculate the actual values of indicators - consolidated financial statements;
to calculate forecast values of indicators
EVA - forecast financial statements, business plan,
financial and economic model and more.
Minimizing the weighted average cost of total capital.
To improve the efficiency of capital use (optimize the relationship between financial stability, price and return on capital), an analysis of the capital structure is carried out.
Let's consider the process of optimizing the capital structure using the method described by I.A. In blank.
In accordance with this methodology, attracting additional capital, both from the enterprise’s own sources and from borrowed funds, has its limits and is usually associated with an increase in its weighted average cost. To attract investors, it is necessary to pay more income on shares or bonds when placing an additional issue.
When receiving additional loans, the value of the autonomy coefficient decreases and, as a consequence, solvency, which means an increase in the interest rate for the loan due to an increase in the level of bankruptcy risk. Similarly, when additional loans are invested in capital goods, inventories and other low-liquid assets, the liquidity ratio decreases, which also leads to an increase in the interest rate for the loan.
Attracting additional loans with a high level of financial leverage, and therefore financial risk, is possible only on the terms of an increased interest rate for the loan, taking into account the risk premium for the bank.
SrStSovCap = DolActCap*DivVyp + DolLoanCap*(StavCredit*(1 - CashPrib)), where
SrStSovCap - weighted average cost of total capital, %;
DolActCap - share of share capital;
DivVyp - level of dividend payments, %;
DolZaemCap - share of borrowed capital;
StavKred - level of interest rate for a loan, %;
NalPrib - income tax rate.
In contrast to the criterion of added economic value, indicator and model of monetary value added CVA( Cash value Added), which is practically never used in practice. are based on cash flow assessments. This model was developed by the Boston Consulting Group (BCG) as an alternative to the EVA approach.
The CVA indicator represents the difference between the cash flow from the operating activities of a project or business and the capital invested in it. In turn, the invested capital in monetary terms for each period is determined as the product of its average WACC value and the gross volume of investments.
For the purposes of investment analysis, the CVA value for a specific period t can be determined by the formula: CVA(t) = NOPAT(t) + DA(t) - RDFA(t) – IC(0) * WACC
Where RDFA(t) is the reimbursement of the depreciation fund (economic depreciation of assets). RDFA(t) is defined as a constant payment that should be made periodically at the average cost of capital rate in order to accumulate an amount equal to the gross investment in fixed assets of the FA project. Since the values of RDFA(t) are the same for any period of the project's life cycle, the stream of such payments represents an annuity, the future value of which, when compounded at the WACC rate, must be equal to the initial investment in the depreciable assets FA. Then its value can be determined from the following relationship: 
where FA is the initial gross investment in the fixed (depreciable) assets of the project. As in the EVA model, the correct use of monetary added value when evaluating investment projects leads to an exact match with the integral result obtained using the classical NPV method:
Market value added (MVA) is a measure that measures the amount by which a company's market capitalization (that is, the market price of its shares multiplied by the number of shares outstanding) exceeds the value of its net assets as shown on the balance sheet. This indicator is calculated using the following formula:
MVA=Market Value of Capital - Invested Capital
The MVA indicator has some disadvantages. First, it does not provide any insight into when the value was created (it could have happened this year or many years ago). Therefore, it would be more correct to focus on the annual change in the MVA indicator. In addition, since the amount of capital employed is taken from the balance sheet, the existing limitations of accounting methods are reflected in this indicator.
SVA(Shareholders Value Added) Model was the forerunner of the EVA model. It also sees the value of an enterprise as the value of its property (in the event of its sale) plus the current equivalent of net income from the commercial use of this property (in the event that the enterprise continues to function as an operating one). Thus, the model focuses on directly measuring the change in the value of a business to shareholders (equity value), or shareholder value.
SVA calculation is based on determining the following parameters: net cash flow and residual value of the business.
SVA = estimated equity value – book value of equity
The main disadvantage of this model is the complexity of calculations and the difficulties associated with forecasting cash flows.
The procedure for calculating the shareholder value added (SVA) indicator
Let the following data on the company be available:
net operating profit (EBI) for the last reporting year - 20,000 units;
duration of the forecast period - 5 years;
growth rate of net operating profit - 15%;
the rate of incremental investment in non-current assets and working capital is 50% of the increase in net operating profit;
weighted average cost of capital (WACC) - 12%.
In English-language economic and business literature the concept is widely used value driver , which is translated into Russian, either as a factor or as a mechanism. Driver means drive, driving mechanism. Therefore, this concept is broader than the traditional concept of factor. The first includes not only power, but also the way it is included in the process and the direction of action. It is characteristic that a driver is a more specific concept than a factor and is less generalizable.
The whole variety of factors influencing the formation of the value of an enterprise can be divided into three levels:
macro-level factors covering political, economic, legal, infrastructural, social, environmental features of the country;
meso-level factors covering the state of the industry in which the company operates;
micro-level factors covering the financial and economic state of the business, production potential, the marketing environment in which it operates, its corporate and organizational management structure.
Russian intersectoral modelRIM - the calculation is carried out “from final demand”: incomes together with prices form the value of real final demand, which ultimately determines the scale of production. The model implements the idea of market equilibrium - the idea of mutual influence of production, prices and income.
RIM- a macroeconomic intersectoral model of market equilibrium in the Russian economy, combining a traditional intersectoral approach and an econometric description of the behavior of the main market actors. The information base of the RIM model includes input-output tables in constant and current prices for 1980-2002, the general government budget, the balance of income and expenditure of the population, the labor balance, the capital balance, statistics of money circulation and financial markets.
In this intersectoral model, all elements of final demand are presented in an industry context. Thus, within the framework of this model, the problem of not only general, but also intersectoral equilibrium is realized.
In accordance with the structure of the developed inter-industry balances, the economy in the model RIM is represented by the following twenty-five industries:
1.Electric power industry
2. Oil production
3.Oil refining
4.Gas industry
5. Coal industry
6.Other fuel industry
7. Ferrous metallurgy
8. Non-ferrous metallurgy
9.Chemical and petrochemical industry
10.Mechanical engineering and metalworking
11.Forestry, woodworking and pulp and paper industries
12. Construction materials industry
13. Light industry
14.Food industry
15.Other industries
16.Construction
17.Agriculture and forestry
18. Freight transport and industrial communications
19. Passenger transport and non-production communications
20.Sphere of circulation, including commercial activities
21. Other activities in the sphere of material production
22. Education, healthcare, culture and art
23. Housing and communal services and consumer services.
24. Management, finance, credit, insurance
25.Science and scientific service
As part of interindustry calculations using the model indicators are also used average annual number of employees and average annual value of fixed assets.
Central part of the model are determination of gross outputs and industry prices using a static model of the input balance (in matrix form: x = (E - A)-1*y) and its modification - the interindustry price equation (in matrix form: p*(A * X) + va = p*X)8.
Edwards-Bell-Olson (EBO) model
The EBO model allows express the value of share capital through financial statements, taking into account adjustments made to them related to inadequate reflection of the value of the enterprise’s property. According to this model, the value of a company is expressed through the current value of its net assets and the discounted flow of “excess income” - deviations of profit from “normal”, i.e. industry average.
Difference between EVA and EBO- is that EVA covers all capital invested in the company (equity and debt), and EBO covers only equity (equity).
One of the most well-known approaches to business valuation is the method based on the assessment of economic added value ( Economical Value Added, EVA), which shows the value added during the period, taking into account opportunity costs, and the amount of investment aimed at expansion that will add value in the future. Let's look at an example of a business valuation methodology based on EVA and the procedure for analyzing the obtained indicator values. In addition, the article presents formulas for determining the indicator EVA and a complete interpretation of their components is given.
Economic Value Added is a tool that shows how to measure, manage and influence profitability.
Before we begin to describe business valuation based on economic value added ( EVA), it should be noted that large Russian organizations are moving to a business management concept based on a cost approach ( Value Based Management, V.B.M.). system V.B.M. at the upper level of cost factors can be represented as follows (Fig. 1).
Rice. 1. System V.B.M. at the upper level of cost factors
Concept EVA often used as a more advanced tool for measuring the efficiency of departments, as opposed to net profit, due to the fact that EVA evaluates not only the final result, but also the price at which it was obtained, that is, how much capital was used and at what price. If the indicator EVA chosen by the organization as a criterion for assessing the effectiveness of its activities, then the task is to increase the value of this indicator.
Generally accepted indicators do not allow a complete assessment of the organization’s performance and accurately determine how much the owner’s capital costs and what income it brings.
The market value of an organization may exceed or be less than the book value of net assets, depending on the future profits of the organization and is determined by the formula:
Q= A + EVA,
Where Q— market value of the organization;
A - net assets (at book value);
EVA— economically added value of future periods, reduced to the present time.
Note that:
- If EVA= 0, the market value of the organization is equal to the book value of net assets. In this case, the market gain of the owner when investing in this organization is equal to 0;
- EVA> 0 means an increase in the market value of the organization over the book value of net assets, which stimulates owners to further invest funds in the organization;
- EVA < 0 говорит об уменьшении рыночной стоимости организации. В этом случае собственники теряют вложенный в организацию капитал за счет потери альтернативной доходности.
The main economic meaning of the indicator EVA is that the organization's capital must work with such efficiency as to provide the rate of return required by the investor, shareholder or other owner.
From the formula for economic added value, one can derive the relative indicator “Return on Invested Capital” ( Return on Capital Employed, ROCE). The economic meaning of this indicator is that economic added value ( EVA) arises if, over a given period of time, it was possible to create a return on invested capital ( ROCE) is higher than the investor's rate of return ( WACC). Investors (owners, shareholders) will not consider themselves satisfied if the return on their capital created by the organization has not reached the barrier rate of return they have set. This principle of formation of the value of an organization is expressed in the following representation of the indicator of economic added value:
EVA = Spread × C.E. = (ROCE - WACC) × C.E.,
Where Spread— yield spread (the difference between the return on invested capital and the weighted average cost of capital). Represents economic value added in relative terms (in%);
C.E.— invested capital;
ROCE— return on invested capital. Defined as follows:
ROCE = NOPAT / C.E..
If Spread positive, this means that the company's profitability exceeds the profitability required by investors.
Next, let’s use a conditional example to evaluate a business based on economic added value. The source data is presented in the Balance Sheet and the Statement of Financial Results. The planning horizon is 3 years, while the growth rate of the main items of the Balance Sheet and the Financial Results Statement will not change and will amount to 23% per year.
For value management purposes, the most informative indicator is the market value of net assets, which allows you to determine the price at which a business can be sold. For our example, the calculation of net assets is given in table. 4.
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Table 4. Calculation of the organization’s net assets in the balance sheet valuation, thousand rubles. |
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Indicators |
At the beginning of the period |
At the end of the period |
Change (+/-) |
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Intangible assets |
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Fixed assets |
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Construction in progress |
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Profitable investments in material assets |
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Long-term financial solutions |
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Other noncurrent assets |
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VAT on purchased assets |
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Accounts receivable |
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Short-term financial investments |
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Cash |
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Other current assets |
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Total assets |
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Targeted funding and revenues |
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Borrowed funds |
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Accounts payable |
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Debt to founders for payment of dividends |
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Reserves for future expenses |
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Other liabilities |
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Total liabilities excluded from the value of assets |
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Net asset value |
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As we can see, the value of the net assets of the organization under study increased over the period by 21,298 thousand rubles, or 19.45%.
The dynamics of changes in economic added value can be traced using a diagram (Fig. 2).
Rice. 2. Dynamics of economic added value
Thus, in our example EVA> 0, which means that the value of the organization is growing and the available capital is being used effectively. In addition, the organization's capital ensured the rate of return on invested capital established by the owner of the organization and brought additional income (added value). The value of ROCE > WACC indicates that the organization managed to earn added value during the analyzed period. The profitability of the organization exceeds the profitability required by the investor (there is a positive yield spread).
K. V. Zhelnova,
Candidate of Economic Sciences
The material is published partially. You can read it in full in the magazine
In the field of corporate finance economic added value(EVA, developed and is a registered trademark of the consulting company Stern Stewart & Co) is considered as an indicator of intra-company efficiency and serves as a measure of the value created by the company in a single period of time (month, quarter or year). Economic value added is a financial measure of what economists sometimes call economic profit or economic rent.
Economic Value Added (EVA) is an indicator of a company's economic, rather than accounting, profit after paying all taxes and reduced by the amount of fees for all capital invested in the enterprise.
Algorithm for calculating the indicator of economic added value: from the net operating profit (), the fee for the use of equity and borrowed capital is subtracted, the remaining amount is the created value, which is measured by EVA.
The logic of the indicator of economic added value is that it is not enough for an enterprise to simply have a positive or earnings per share, it is necessary to ensure a level of profitability that allows not only to receive a return on invested capital that exceeds the cost of raising capital, but also to create additional value .
In the theory and practice of calculating EVA, you can find several calculation methods indicator of economic added value:
EVA = (r-c) * K = NOPAT - c*K
Where,
r - return on invested capital (), r = NOPAT/K;
c - ;
K - own working capital (capital employed) = total assets - current liabilities.EVA = NOPLAT - DCC = NOPLAT - IC * WACC
Where,
NOPLAT - ;
DCC - normal capital costs;
IC is the amount of invested capital, calculated by the formula:
IC = (O TA - B TO) + OS + (A P - BO P)
Where,
O TA - operating current assets;
B TO - interest-free current liabilities;
OS - net fixed assets (i.e. real estate, industrial premises, equipment);
A P - other assets;
BO P - other interest-free obligations.
In corporate reports, a modified method for calculating EVA is more common, which involves using the return on invested capital indicator - ROCE, i.e. EVA occurs when a corporation or other business entity has been able to generate a return on invested capital greater than the WACC over a given period of time. Thus, the owners will be satisfied if the return on capital invested in the corporation reaches the established rate of return:
EVA = (ROCE - WACC) * IC = Spread * IC
Where,
Spread is the difference between the return on invested capital and the weighted average cost of capital (yield spread). Spread represents economic value added in relative terms, %.
If Spread > 0, then the corporation received a profitability in the reporting year that exceeds the profitability level set by investors.
The use of this option is due to its certain advantages. From the calculation, it becomes possible to see the return on capital employed, as well as the size of the gap (Spread) between it and the cost of capital. The percentage value of such a gap is EVA, only in relative terms. The main advantage of EVA compared to all indicators is that, unlike them, it can show the net contribution of the company and its structural divisions to increasing market value. The high significance of this category is reinforced by the formation of a whole scientific approach around it, called value based management. According to this approach, all company management should be aimed at maximizing EVA, since it is the only criterion for increasing the company's market value.
However, all approaches to calculating the EVA indicator are based on the calculation formula proposed by B. Stewart:
EVA = NOPAT - WACC * IC
Where,
IC (Invested Capital) - invested capital (adjusted value of total balance sheet assets at the beginning of the reporting period).
To accurately calculate EVA, it was proposed to use 164 adjustments to various indicators, the list of which is closed. At the same time, as B. Stewart noted, to use the EVA indicator for management purposes, it is enough to apply only some adjustments that have a significant impact on reporting.
Invested capital (IC), unadjusted, is the difference between total assets and non-interest-bearing current liabilities:
Where,
IC - invested capital (without adjustments);
NBV (Net Book Value) - total capital (advanced capital);
NPL (Non Percent Liabilities) - interest-free short-term liabilities, i.e. accounts payable to suppliers, budget, advances received, other accounts payable.
Economic Value Added Model(economic profit) is one of the models used to estimate the value of a company. In this regard, it is generally accepted that a company's value is the best tool for measuring its operating performance because its valuation typically requires complete information. It is not short-term, unlike other indicators.
The economic added value model suggests that it is on the basis of such an indicator as economic added value that company standards should be developed to determine goals and evaluate its successes and failures.
The economic value added (EVA) indicator can be considered as a modified approach that combines the requirements and interest of both shareholders and company managers in assessing its activities.
Using EVA as a tool for assessing the efficiency of use of invested capital allows company managers to make more informed decisions about the expansion of profitable areas of activity and, equally important, helps to identify inefficient use of funds in projects whose profitability does not cover the cost of raising capital.
The popularity of EVA leads to the emergence of completely different interpretations of it, different from the originally developed definition. Thus, The Coca-Cola Company understands added value as the difference between the EVA of the reporting and base periods.
A negative aspect of EVA is the multiplicity of methods for calculating the component of this indicator - the total capital employed, which ultimately can lead to inadequacy when conducting a comparative analysis of two companies based on the EVA indicator.
Despite its shortcomings, the indicator of economic added value is the most effective tool for determining the return on investment in the capital of a company. The quality of disclosure of information about the value-added management system directly affects the increase in the investment attractiveness of the company. In the works of modern researchers such as M.A. Vakhrushina, A. Gershun and M. Gorsky, A.I. Krivtsov, D. Martin, V. Petty, contains variants of similar reports. Some of the disadvantages of the proposed options for disclosing information about EVA may be that all of the listed authors propose to show investors the final EVA indicator and do not disclose either the sources of its formation or the target orientation towards the company's stakeholders. Additional detailing of this indicator will be able to provide more complete information about the sources of formation of the company’s value, the distribution of these sources, moreover, it will be able to solve the problem of determining the relationship between the volume of capital investments and the share of profit attributable to them.
