Performance of Indian Automobile Industry: Economic Value Added (EVA) Approach

Abstract

Maximizing shareholders value is becoming the new corporate standard in India. The corporate, who gave the lowest preference to the shareholders' inquisitiveness, are now bestowing the utmost inclination to it. Shareholders' wealth is measured in terms of the returns they receive on their investment. The returns can either be in the form of dividends or in the form of capital appreciation or both. Capital appreciation in turn depends on the subsequent changes in the market value of the shares. This market value of shares is influenced by a number of factors, which can be company specific, industry specific and macro-economic in nature. An important goal of financial management is to maximise the wealth of the organisation, highest capital employees' wealth and consequently enhance the value of the firm. Shareholder wealth is traditionally reflected by either standard accounting parameters (such as profits, earnings and cash flow from operations) or financial ratios (including earnings per share, return on capital employed, return on net worth, net profit margin, operating profit margin, etc). All these indicators failed to measure the true economic worm due to manipulative accounting techniques to state higher or lower earnings, depending on non meaningful decision on how to record revenues or expenses. Further, financial information is used by managers, shareholders and other interested parties to access their firm's current performance, and also by stakeholders to predict its future performance. The question that then arises is, whether these measures of corporate performance are linked to the expectation of the shareholders or not. To help corporate to generate value for shareholders, value-based management system has been developed. Over the past several years, an alternative performance measure called Economic Value Added (EVA) has been gaining acceptance around the globe and has also been acknowledged by institutional firms as a credible performance measure. In order to overcome the limitations of accounting based measures of financial performance, Joel M Stern and G. Bennett Stewart & Co., introduced a modified concept of economic profit in 1990 in the name of Economic Value Added (EVA) as a measure of business performance. Stern Stewart has claimed that EVA, as a tool of financial management, was neither ‘just a phenomenon’ nor was it limited to ‘for profit’ organizations. Economic Value Added has been put to use for management performance evaluation, and is more than just a measure of performance, it is the framework for a complete financial management (for improving scarce capital allocation and valuation of a target company at the time of acquisition).