Economic Value Added!?

[Prince]

Economic Value Added - what is that? Well i know what is that....
If you comparing two companies , one’s EVA is higher then other , which one in better position? And Why!? I guess the company with higher EVA is in better position , but WHY!?
P.S I dont need Definitions :rolleyes:
Thanks

[Abu Hurayra]

Economic Value Added - what is that? Well i know what is that....
If you comparing two companies , one’s EVA is higher then other , which one in better position? And Why!? I guess the company with higher EVA is in better position , but WHY!?
P.S I dont need Definitions :rolleyes:
Thanks

Its something like Intangible value added to your company as a result of efficiency of the working stuff of the company...
In two words EVA= Net sales -Cost of Capital.
If your company(all the stuff of workers) will use those resources that company owns efficiently(by avoiding losses in production, to improve process management,to prolong the payables and win by the time value of the money,to fasten the product cycle speed etc..) you will gain more Net Sales, as a result more profit...
Managers,Cotrollers and other financial guys can analize the Efficiency of Company by using EVA method.

for definitions just google...

respects!

[Martingale]

In two words EVA= Net sales -Cost of Capital.


What do you mean by net sales? net income? earnings?:rolleyes: And One important thing to mention about Economic value added or EVA is that it will be given in $$$, not in percentage. So cost of capital is automatically dismissed from your formula.

This is the most common appearence of EVA:
EVA= (Return on capital - cost of capital) * Initial investment.


Managers,Cotrollers and other financial guys can analize the Efficiency of Company by using EVA method.


Economically it can measure efficiency, but finance/investment department will use EVA to value the firm.

Eva, in a sense, can be called surplus value, cause it's the free cash flow created by investment. It's one of the most famous valuation techniques used to value the firm. So in your case, you should definitely go with the firm which has higher EVA. But EVA for one year may not be sufficient, so take multiple years and evaluate the firm in DCF(discounted cash flow) terms.

Here is the value of a firm using EVA method:

Value of a firm= Initial Investment+Present value of EVA from assets in place + Sum of PV of EVA from new projects.

I hope it helped a little bit.;)

p.s. Actually EVA is much easier than other Valuation techniques i.e. CFROI(cash flow return on Investment). That's a specifically tailored form of DCF valuation. You dig into each component on a company's financial statement more broadly. Unnessesary workload I think. Though I would stick to DCF valuation when it comes to theory.:cool:

[Prince]

First of all , EVA = Operating Profit before tax - Weighted Average Cost X Capital Employed
Thanks for all info , but u did not answer my question: which was: guess, the company with higher EVA is in better position , but WHY!?
Toest ya hochu KONKRETNO chto nibud uslishat... ne nado mne Teroriyu ili dokazivat chto takoe EVA , prosto esli sravnivat 2 companii u odnoy companii EVA lutshe chem u drugoy CHTO ETO ZNACHIT!? end of story!!
Thank you both of u guys :) Lets discuss it....

[Prince]

Simply stated , EVA is just a way of measuring an operation's real profability! In other words. Lets they we have 2 companies , one with NEGATIVE and other with POSITIVE EVA , or one with higher EVA then other. If your EVA is postive , congratulations - your operation is creating WEALTH. If it's negative , you have just learned your operation is destroying your CAPITAL! You'd better fix it, fast!
Lets talk how to change your EVA or Raise It:
There are just three ways to increase it:
1) Earn more profit without using more capital
2) Use less capital
3) Invest capital in high return projects.

Bingo!!!!!!! Here's the answer :P

[Martingale]

[quote=Prince]First of all , EVA = Operating Profit before tax - Weighted Average Cost X Capital Employed

Prince, come on, don't be so mean! What you wrote is also true. Let me put it this way!

My version: EVA=(return on capital - cost of capital) X Initial investment.
First, cost of capital=Weighted average cost of (capital) or WACC,
capital emloyed=initial capital
Working on my formula, if you multiply each percentage by initial capital, you get - return on capital X Initial investment(This gives us EBIT or Operating Profit Before Tax) - Cost of capital x Initial investment= EBIT-WACC X Initial Investment

The EVA formula I wrote up has better understanding then others. You just get R (Return) from 10-k or WSJ whatever your source is and compare it with WACC of the company. That's why it's the most common form of EVA.


Thanks for all info , but u did not answer my question: which was: guess, the company with higher EVA is in better position , but WHY!?
Toest ya hochu KONKRETNO chto nibud uslishat... ne nado mne Teroriyu ili dokazivat chto takoe EVA , prosto esli sravnivat 2 companii u odnoy companii EVA lutshe chem u drugoy CHTO ETO ZNACHIT!? end of story!!
Thank you both of u guys :) Lets discuss it...


Prince, you asked a theory question, that's why I answered as best as I can. It seems to me that you didn't get my message, I wrote the most important implication of EVA. Of course, the company with better EVA is a reasonable choice. It indicates the return is higher. But there are also some other factors which may influence your decision.
As I told you one year is not enough to make proper decisions. And according to your statement, you are just picking the firm which had higher EVA. THAT"S WRONG! you should use my second formula to value the firm.
Simply stated , EVA is just a way of measuring an operation's real profability! In other words. Lets they we have 2 companies , one with NEGATIVE and other with POSITIVE EVA , or one with higher EVA then other. If your EVA is postive , congratulations - your operation is creating WEALTH. If it's negative , you have just learned your operation is destroying your CAPITAL! You'd better fix it, fast!
Lets talk how to change your EVA or Raise It:

Why are you explaining it if you already knew the answer?:rolleyes: You are giving the basic interpretation of EVA. Hmm...
Again you are looking at EVA from economics perspective. My answer adresses financial use of EVA.
There are just three ways to increase it:
1) Earn more profit without using more capital
2) Use less capital
3) Invest capital in high return projects.


Not to hard to come to these decisions, they are derived from the formula. Just have a look.;)

p.s. I was actually not copying & pasting here.:rolleyes: One more thing: if you don't know the theory, you won't understand the application of the matter in real life. Good Luck!

[Prince]

Actually it was homework question , and today i got the answers i asked it yesterday i did not know the answer , I showed my own version based on ur answers and my professor told me: BS :)
Now u know the answer , maybe u r right i dont know...
I just gave u the answer what was written by Fortune Magazine , September 20 1993
CHeers ,
P.S: If u think that i were wrong , just contact the Fortuna guys , and tell them that they were wrong , that you found some mistakes on their article , and i'm pretty sure they gonna give u some cash reward for that
Once again , i was trying you guys gave the "right" answer what i got
Thanks for ur responses again

[Prince]

[QUOTE]
As I told you one year is not enough to make proper decisions. And according to your statement, you are just picking the firm which had higher EVA. THAT"S WRONG! you should use my second formula to value the firm.


Once again i asked clearly: WHY THE COMPANY WITH POSITIVE(HIGHER) Number is doing better then other one? when u making analysis , the person who hire u and pays you lets say 45K/year , he wants to hear whatever he asks in other words, he wants answer to his questions, if he asks you question WHY our EVA is higher and WHY we are doing better compared to other company? You dont have to tell him about company's HISTORICAL income or liquidity! u have to answer question!
Using the equation i Gave u: if u compare 2 companies and one is have better EVA then other one , you can 100% say that company with higher EVA is in better shape!!! u dont have to use ur second equation :P

I really appreciate all ur responses and hope we’ll discuss other issues in near future :)
Peace ,

[Martingale]

Actually it was homework question , and today i got the answers i asked it yesterday i did not know the answer , I showed my own version based on ur answers and my professor told me: BS :)
Now u know the answer , maybe u r right i dont know...
I just gave u the answer what was written by Fortune Magazine , September 20 1993
CHeers ,
P.S: If u think that i were wrong , just contact the Fortuna guys , and tell them that they were wrong , that you found some mistakes on their article , and i'm pretty sure they gonna give u some cash reward for that
Once again , i was trying you guys gave the "right" answer what i got
Thanks for ur responses again

Prince, how did you show your version to your professor based on my answers?:) You wrote back to my post in a few minutes. Or do you have evening classes?:P I didn't really get you. What exactly he said BS?

Where I said you were wrong?:? I just explained that the formula you wrote and the one I did, are the same, but expressed in different ways.
Just wondering what class are you taking? Economics realted or finance related? Seems like you wanted to define EVA's economic value...though you are asking a pure financial question:To value and pick one of the firms based on EVA...:rolleyes:

[Martingale]

[quote=Laziz_uwed]

Once again i asked clearly: WHY THE COMPANY WITH POSITIVE(HIGHER) Number is doing better then other one? when u making analysis , the person who hire u and pays you lets say 45K/year , he wants to hear whatever he asks in other words, he wants answer to his questions, if he asks you question WHY our EVA is higher and WHY we are doing better compared to other company? You dont have to tell him about company's HISTORICAL income or liquidity! u have to answer question!
Using the equation i Gave u: if u compare 2 companies and one is have better EVA then other one , you can 100% say that company with higher EVA is in better shape!!! u dont have to use ur second equation :P

I really appreciate all ur responses and hope we’ll discuss other issues in near future :)
Peace ,

Prince, saying Economic value added is higher at one frim than another and that's why we pick the first one is very simple and baseless decision.
Im not saying it's wrong, but you got to be able to explain why your decision is correct. It looks like you are not familiar with basic concepts such as firm value, DCF etc. (If you are not finance major you don't have to know them at all.) Maybe that's why you are not getting what Im trying to say.

U emas bu emas, siz g'irt uzbecha fikr yurityapsizda. EVA - bu...blah blha degandan kura, uni konkret nima ekanligini, qanday aniqlanishini va qanday ishlatilishini bilvosez, iqtisodiy manosini yanada chuqurroq tushunasiz.
omads,;)

BTW, Im going to the conference(hudo holasa) in a near future, which is exactly on "Valuation Techniques", if I find sth useful(if you are interested of course), I'll be pleased to share it with you.

[Abu Hurayra]

I was not sure while sending my first post,because I had this topic a pretty long time ago in exam,but anyways I did send it to make a discussion circumstance,to see the opinions of forumers.
we could also describe EVA like this way too:
EVA= NOPAT - [Capital Charge]

I did attach excell file concerning the structure of EVA.

whatever it is good sometimes to remember those matters.

I would advice to read this book about this issue:

STERN, SHIELY, ROSS
The EVA challenge, implementing value added change in an organization, Wiley, New York, 2001

se the attachment.

PS: Could write more but have got a lot to do at work...

[Martingale]

we could also describe EVA like this way too:
EVA= NOPAT - [Capital Charge]

True. Different authors give different forms of EVA. But they are all the same.


I would advice to read this book about this issue:

STERN, SHIELY, ROSS
The EVA challenge, implementing value added change in an organization, Wiley, New York, 2001


Wiley finance series are really good.