Valuation through EVA and Traditional Measures an Empirical Study

Abstract

Profit maximization as a concept is age-old, wealth maximization is matured and value maximization is today's wisdom. Economic Value Added (EVA) is one such innovation. Unlike traditional accounting measures of performance, EVA attempts to measure the value that firms create or destroy by subtracting a capital charge from the cash returns they generate on invested capital. Besides the measures like Return on Equity (ROE), 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. It combines factors such as economy, accounting and market information in its assessment. This paper describes and compares the EVA with other measures. Apart from this, taking the real financial data of a company, the paper shows how EVA calculations can be done to demonstrate whether the company is adding to shareholder value by generating profits over and above the capital charge. From the analysis it was found that EVA is the best appropriate measure for measuring the value of shareholders.