Divergence between Accounting and Economic Profit in HUL: An Econometric Approach

Abstract

India is a big hub for Fast Moving Consumer Goods (FMCG) companies. More than 100 crore people of this country depend on FMCG companies for their daily products. To compute the financial performance in Hindustan Unilever Limited (HUL), a leading FMCG company in India, traditional and more common measures are considered. Accounting profit and economic profit are used as the measures of financial performance which mostly report a different profit result for the same enterprise .Net income is the sign of accounting profit and economic profit is indicated by Economic Value Added (EVA). In general, these two measures have very little correlation because they are prepared by different professionals, who apply different principles over different time periods, for different audiences who use the information for different purposes. In view of the above considerations, in the present paper an attempt has been made to understand the difference between EVA and its older cousin, net income and also to find the factors influencing EVA with taking an evidence of HUL. Further the paper analyzed the impact of the factors that seem to influence EVA. The analysis covered the data series of nineteen years from 1992 to 2007 in calendar years and last three years from 2008-09 to 2010-11 in financial years. The gathered data is analyzed by using econometric tools viz. cause and effect analysis, multiple regression etc. The paper ends with a debate on the effectiveness of EVA and highlighting the limitations of the study.