Chapter 14 - EVA, Economic Profit, and Cash Value Added do not Measure Shareholder Value Creation

Abstract

This chapter discusses the fact that economic value added (EVA), economic profit (EP), and cash value added (CVA) do not measure shareholder value creation. The equity value, shareholder return, and increase in the CVA (according to the Boston Consulting Group) of the world's 100 most profitable companies for their shareholders during the period 1994–1998 are presented in the chapter. The low correlation between the shareholder return and the increase in the CVA is striking. The chapter analyzes the relationships among shareholder value creation and several other parameters, including EP and EVA, during the period 1992–1998. Many firms use EVA, EP, and CVA as better management performance indicators than earnings because they refine earnings with the quantity and risk of the resources that are used to obtain such earnings. The measures proposed for measuring the shareholder return or return on investment by the consulting firms that use the EVA, EP, or CVA are return on assets (ROA), return on equity (ROE), and cash flow return on investment (CFROI).