The Strengths, Weaknesses and Uses of the Economic Value Added (EVA) Mode - Essay Example

Only on StudentShare

Extract of sample
The Strengths, Weaknesses and Uses of the Economic Value Added (EVA) Mode

Economic Value Added (EVA) EVA is a relatively new technique of measuring financial performance of companies. This tool relies on three basic elements which are Net Operating Income adjusted after taxes (NOPAT), the investment amount and the weighted average cost of capital (Hansen & Mowen, 1997). EVA can be calculated as: EVA = After tax operating income – (investment in assets x weighted average cost of capital) The amount calculated under EVA is an absolute dollar amount. The amount calculated can be either have a positive value or can have negative value. The positive value shows that the organization has remained successful in generating more Net Operating Income After Tax (NOPAT), well covering the cost of investments that were employed. On the other hand, negative values shows organization’s failure in recovering the costs of investment as its cost of investments exceeded the Net Operating Income After Tax (NOPAT). Obtaining the positive value of EVA is the core objective of any organization. Strengths of EVA EVA has significant strengths which have increased its popularity tremendously. In the following discussion, more attention will paid on different aspects of EVA. 1. Better Measure EVA has turned out to be a better measure in terms of performance measurement of different stakeholders in organizations. ...
Download paper

Summary

In the recent years, new arrivals techniques pertaining to performance measurement have gained plenty of financial managers’ attention and appreciation. Those techniques include “Residual Income”, “ROE”, “ROCE” “EVA” etc. However, every technique has its own strengths and weaknesses…
Author : jrosenbaum

Related Essays

Discuss the banking regulatory and market framework in UK, address the strengths, weaknesses, opportunities and threats
In 2009, collections for insurance premiums alone totalled nearly ?200 billion. The UK market for equities garnered 17% share of the global market in 2009, ranking only behind New York. Likewise, the fund management industry ranks among the world’s largest, managing some ?4.1 trillion for the year 2009. All in all, the financial services sector turned in the largest volume of corporate taxes for 2010, which comprised 11.2% of total tax receipts for the entire year. Contribution of output & employment to the UK economy from each financial services sector Financial Services Sub-Sectors Output...
40 pages (10040 words) Assignment
Strenghs, Weakness and Uses of the Economic Balue Added
This paper candidly evaluates the uses of Economic Value Added model in a business as well as its strengths and weaknesses. Uses of EVA EVA is obtained by subtracting the cost of capital from Net Operating Profit After Tax (NOPAT).In this regard, Al Ehrbar (2008) depicts that it is a useful tool for measuring the extent to which value has been lost or added on the business performance. After accounting for the various aspects covered by the balance sheet, EVA indicates the amount of the residual income. There are various factors that cause an increase of EVA. First, if capital employed does...
6 pages (1506 words) Essay
Economic Value Added (EVA) Statement
EVA is one such performance measurement tool that captures the financial profit and shareholders wealth. “EVA subtracts the cost of capital from the net operating profits after tax (NOPAT) generated in the business. It is a measure of the residual income from the income statement after accounting for the cost of the balance sheet” (Economic Value Added, 2007). How can Economic Value Added (EVA) Statements be used to improve financial statement reporting, results, and success? EVA statements are formed on the basis of two financial statements-the balance sheet and the income statement. EVA...
3 pages (753 words) Research Paper
For And Against Regulation And In The Light Of This Evaluate The Strengths And Weaknesses Of A Regulatory
The review proposes that in a bid to ensure regulation consistency, the UK should adopt a single regulator approach across business lines. The review further acknowledges that importance of having the central bank as a systemic regulator. The principle based and light touch regulations are discouraged by the review and instead, focus is directed on rule bases regulations which are more intensive that are geared toward an extensive systemic risk as well as macroeconomic policy. The review therefore provides financial institution and banks a prudential regulation for future operations....
9 pages (2259 words) Essay
Economic Value Added
Thus it requires managers and employees to focus on how capital is utilized and how it generates cash an important idea for all investor analysis of a corporation. There is usually a common goal for all corporations which are to obtain capital and earn a return rate exceeding that of the capital. In order to achieve this goals EVA measure the amount of money left after deducting the capital thus providing a financial statement reporting. EVA can be used to determine whether an corporation is accountable for economic outlays whether they are on the balance sheet, income statement or in the...
3 pages (753 words) Essay
How can Economic Value Added (EVA) statements be used to improve financial statement reporting, results, and success? What are s
By deducting the cost of capital and capital itself from the profit made by a business enterprise, the shareholders are able to know the value created by the capital (and includes debts) they put in the company. It is a given that all business operates under the principle of profit motive, which intends to generate revenue. The practice of Economic Value Added (EVA) however helps the financial reporting of a company’s performance to its investors and shareholders by reporting the rate of return of the investor’s risk taking in the company which enables the investors and shareholders to...
3 pages (753 words) Essay
EVA Analysis
However, as IBM has faced competition in the computer hardware subsectror of the IT sector, it has diversified into other areas and become a big product in these areas. IBM has become more active today in the software sector as well as the cloud computing sector. In fact the area where the firm is most successful is the software sub-sector. IBM now has four main divisions which include Financing, Hardware, Services, and Software (Lines & Ambler, 2012). Each of the four departments in IBM has different profitability and this means that if the investors were to value each individually rather...
12 pages (3012 words) Research Paper
Got a tricky question? Receive an answer from students like you! Try us!