Dissecting EVA: The Value Drivers Determining the Shareholder Value of Industrial Companies

Abstract

This study aimed to address issues of shareholder value creation. The EVA model of value creation was used in this study as it is arguably one of the best methods to express and quantify shareholder value creation. As a starting point, EVA was dissected into various building blocks or components (value drivers). In the empirical section of this study, multiple regression analyses of a company's EVA and identified variables were undertaken. The variables that explained or contributed most to EVA were a number of profitability ratios (in the case of the all company sample). Balance sheet ratios or variables did not provide significant explanations of a company's EVA in this sample. For companies that generate positive EVAs, the total regression coefficients not only increased in value, but, more importantly, there was a move away from profitability ratios towards balance sheet ratios. When the regression analyses were performed on the top 20 EVA companies, balance sheet ratios took centre stage. One can conclude that initially profitability (income statement) ratios are the most important factors in the wealth creating process. However, as companies become established wealth creators and keep improving on their performance, profitability ratios become less important. Efficient financing of the balance sheet, efficient fixed asset and working capital management become top priorities in creating shareholder value.