ECONOMIC VALUE ADDED

Economic Value Added

[Writer`s Name]

[Institute`s Name] Economic Value Added

About the company

Stern Stewart & Co is a worldwide management consulting firm founded in New York in 1982. The company developed the Economic value added concept and currently owns the trademark. The current CEO and chairman of Stern Stewart & Co., New York is Joel M. Stern. Its core businesses are management consulting and research; focusing on implementing its proprietary Economic value added methodology (Austin, 2005).

The firm also has a sister company called Stern Stewart Capital Partners, SSCP, based in Singapore which labels itself as a transactional advisor, corporate financier and funding partner. Stern Stewart Capital Partners acts as an advisor on corporate transactions and takes equity stakes in most of the firms that it assists.

About the EVA

All companies drive for achieving their all defined partial goals and thus also the top financial goal, which is the measurement of the corporate performance. Every company can use different indicators as the main financial goal, but in the present scientific literature, there is most recommended to use the indicator economic value added (EVA), on which the firm Stern&Stewart has the copyright. EVA is defined as the net operating profit after taxes reduced by cost of capital. In other words, it is an economic over profit that remains the equity holders after considering all economic cost. Implicit cost are, in this case, cost of equity, because they are lost revenues, that would the alternate investment with the same rate of risk earn to the equity holders. This indicator has some advantages as compared with the traditional “accounting” indicators like the profit, profit per share, return on sales (ROS), return on equity (ROE) or return on investment (ROI). Mention these advantages:

Indicator EVA has a big linkage on share prices

In the indicator EVA there is considered the risk, that is bearded by the investors

The indicator EVA is usable for the corporate evaluation and also as the top performance indicator

In the indicator EVA there are considered many information's, that are got from financial reports, this implies lower work difficulty during its quantification

These facts are also acknowledged by researches of other authors. There is a big linkage between EVA and return on shares (by which is the share price derived). Therefore, the prediction of share prices is more accurate, when the analyst considers the values of EVA that was achieved by the company in previous periods. The using of indicator EVA is recommended. This research proved that the companies, that used EVA as a financial goal, achieved better results in the area of capital market. But some authors draw attention to some deficiencies of EVA. Came to the conclusion, that there is not a direct linkage between EVA and the making of shareholder value, because the calculation of EVA is, at least partly, affected by the accounting methods. Furthermore, authors recommend using the indicator REVA (refined economic value added). The difference compared to EVA is, that to calculate REVA there is used the investment appreciated in market prices (not ...