EVA/SVA, Gap Analysis Flashcards
What is EVA?
Economic Value Added
Estimate of true economic profit after making corrective adjustments to GAAP accounting
What does EVA refer to?
Profit less charge for capital employed
What is SVA?
Shareholder Value analysis
Variation of EVA
Main aim of the organisation is to add value to shareholder wealth.
Shareholder value is the total return to shareholders in terms of dividends and share price growth calculated as PV of future free cash flows
What are the seven drivers to maximise future cash flows (SLOWCAT)?
Sales growth rate
Life of the project
Operating profit margin
Working capital
Cost of capital
Asset turnover
Taxation
What are the advantages of EVA/SVA?
Adjustments made to profit effectively mean we are looking at cash-flow based measures
Consistent with NPV so should ensure better goal congruence between divisional performance and maximising shareholder value
Cost of financing emphasised
What are the drawbacks of EVA/SVA?
Uses accounting data which has been prepared for other purposes
Ignores items that don’t appear on balance sheets e.g. brands, staff
Confuses management as they are seldom trained fully in its operation and it varies from one company to another
Costly to maintain and resistance is usually high when first deployed
Assumes value can be measured in money terms
Judgement involved by users in evaluation and selection of cost of capital rate to be used
How do we close an efficiency gap?
Undertaking an efficiency drive
Organisation looks to make cost savings and any other actions that will improve the output for a given set of inputs
How do we close an expansion gap?
Involves looking at ways that the organisation can expand its sales
How do we close a diversification gap?
Involves the organisation taking a riskier strategy where it looks to sell new product to new markets
