Economic value added and market value added - measures for financial performance of firms.

Abstract

Accordingly with the financial theory which has suggested that every company’s final purpose is to maximize the wealth of its shareholders, two of the most popular value based measures are the Economic Value Added (EVA) and the Market Value Added (MVA). Unlike traditional profitability measures, both MVA and EVA measures take into account the cost of equity capital [1]. EVA is a performance measure developed by Stern Stewart&Co that measures the true economic profit produced by a company ant it can be calculated as net operating profit minus an appropriate charge for the opportunity cost of the capital invested in a firm [2]. As an important management tool, EVA can help managers to incorporate two basic principles of finance into their decision: maximization of the shareholders’ wealth and the company value depends on the extent to which investors expect future profits to exceed the cost of capital. Therefore, in comparison with the traditional performance measures, EVA proved to be superior from many points of view: it is a capital allocation tool inside a company, it increases revenue, it reduces the cost of capital, it is the most accurate measure of corporate performance, encourages long-term perspective for managers and employees of the firm. MVA, on the other hand, is simply the difference between the current total market value of a company and its invested capital. MVA is not a performance metric like EVA, it is a wealth metric, measuring the level of value a company has accumulated over time. MVA assesses increase in value with regard to the capital invested. As managers become more familiar with MVA and EVA and understand their potential, these measures may become more widely accepted accounting tools for assessing the financial performance of firms.