Corporate Performance Evaluation through Economic Value Added (EVA) and Other Conventional Measures: An Empirical Study

Abstract

A successful performance measure evaluates how well an organisation performs in relation to its objectives. Since the primary objective of commercial organizations is normally assumed to be the maximisation of the wealth of its shareholders, it follows that performance measures should evaluate this. Besides the traditional measures like Return on Net worth (RONW), Return on Capital Employed (ROCE) and Earnings per Share (EPS), EVA is a new measure available to the corporate managers. The EVA framework developed by Stern Stewart & Company is gradually replacing the traditional measures of financial performance on account of its robustness and its immunity from creative accounting. The present paper measures corporate performance of selected Indian companies by using EVA and other conventional measures. An attempt has been made to analyze the effectiveness of Economic Value Added over conventional measures of corporate performance. The relationship between different measures of performance is studied by using correlation and regression analysis. After detailed analysis it was found that HUL is the best performing company as per three measures of performance namely, EVACE, ROCE and RONW. It was also found that RONW and EVACE are highly correlated and RONW and ROCE significantly affect EVACE.