EVA Flashcards
What is EVA?
The performance of a company as a whole or of an investment centre within a company can be measured in terms of the economic value added
In order to add to its economic value a company or division must make an economic profit in excess of the cost of capital that has been invested to earn the profit
Similarities between RI and EVA. However EVA uses economic profit and value rather than accounting profit and value
What is the calculation for EVA?
EVA = NOPAT minus capital charge
Where:
NOPAT is the net operating profit after tax
Capital charge is the economic value of business assets x cost of capital (%)
Proforma for EVA
NOPAT is calculated from PAT X
Add back items that are non cash, such as:
Accounting depreciation XX
Provision for doubtful debts XX
Non cash expenses XX
Interest paid net of tax XX
Add back items that add value, such as:
Goodwill amortised XX
Development costs XX
Operating leases XX
Take off:
Economic depreciation (X)
Any impairment in the value of goodwill (X)
= NOPAT in cash flow terms
XX
- Deduct the charge for the cost of capital
Capital Employed
Add adjustments to allow for the net replacement cost of
tangible non current assets
= Capital invested - Multiply Capital invested by the cost of capital x% —
= Charge for the cost of capital (XX)
= EVA X
What are the advantages of EVA?
A performance measure that attempts to put a figure to the increase, or decrease, which should have arisen during a period from the operations of a company or individual divisions within a company
Can be measured for each financial reporting period
Based on economic profit and economic values of assets, not accounting profits and asset values
Easily understood by non-accountants
What are the principals of effective report visualisation?
Ensure data is optimised
Relevant visualisation tool must be applied e.g dashboards
Appropriate report layout must be chosen
The reader experience must be optimised
Appropriate delivery channel must be optimised
