what is the usefulness of economic value added in corporate financial reporting?
a critique about the usefulness of E.V.A. in financial reporting
- 1 decade agoFavorite Answer
The link to Stern Stewart is a useful one. I'd explain the reason why someone might care about measuring the difference between a company's return on invested capital and its cost of capital (the basic definition of EVA(R)) is that companies can easily "buy" growth but that's much different than creating shareholder wealth. Management can throw money at projects or make acquisitions and generate an accounting profit. But, if the return on the capital it must spend to do so is less than the firm's cost of capital, management has actually destroyed economic (i.e. shareholder) value. When the incremental returns on new projects is low, growth is actually bad, management should instead divest underperforming assets or restructure.
By measuring EVA, one can get a sense of the average returns a company generates on its entire portfolio of projects. Looking at the trend in EVA can give you a sense of whether incremental new opportunities have been generating better or worse than average returns. Over time, competition tends to drive down the returns a company can generate.
EVA can be used within the company to evaluate projects and assist with compensation decisions and used by external investors to evaluate whether management is making value creating decisions, or merely building an empire.
- desmaraisLv 44 years ago
Tax breaks AND slicing spending is a thanks to tickle the business equipment's Fancy. that is the way it extremely works. lets say you personal 'Bob's known shop', you may now bypass to a rustic with 10% taxes, or you may bypass to a rustic with 50% taxes. the position will you pick to bypass to? You bypass to the country with the bottom taxes for sure. Now, why is this significant? because Bob's known shop, will furnish 5,000 jobs to the country it instruments up in. this facilitates the inhabitants of that u . s ., to initiate paying taxes, because they make money. This has been shown, to chop back unemployment, develop tax sales, develop a kin's capita widely used, decrease poverty, develop productiveness, and develop competition- for that reason lowering expenditures for products. Now, this should be cooped with slicing spending, or the Bush economic equipment will take position (good, then each little thing falls down many years later) Why end spending? because the poorer a authorities is, the a lot less believe that's overseas money would have- do the upward push difficulty of a economic crumple. overseas money is a believe equipment, the overseas money is easily worth some thing- see you later because the authorities of the country continues to be reliable economically. So the richer a rustic is, and extra economically reliable- the better the cost of that's overseas money will be. this would nicely be compared to the inventory market (actual its a suitable get at the same time) Will you purchase inventory from Bob's known shop (who has more suitable all for the period of u . s . a ., and has thousands of thousands of shoppers, and thousands of workers.) Or will you purchase from Fred's known shop? (Witch has 30 shops, with expenditures that exceed Bob's shop, with a lot less selection) you'll purchase Bob's stocks because you think Bob to proceed to develop, and take care of a reliable employer- as apposed to Fred who's having economic problems, and would close down.
- Anonymous1 decade ago