An investigation into the suitability of Economic Value Added (EVA) as a measure of performance evaluation

Kotze, Murison (2007-03)

Thesis (MBA)--Stellenbosch University, 2007.

Thesis

ENGLISH ABSTRACT: This research report evaluated the concept of Economic Value Added (EVA) and investigated the application of EVA as a performance measure to a particular company. It was found that EVA overcomes some of the problems associated with the traditional measures of company performance. These traditional measures are profit based and are calculated from standard accounting methods. They are inadequate measures to account for the creation of shareholder wealth, as they do not take the full cost of capital into account and also distort the economic reality of the company. It was however observed that there are limitations when applying EVA. It was found that significant effort (and associated costs) could be required to implement an EVA system in a company. The EVA calculation can also become very technical, and is heavily biased by the company's risk index (or beta coefficient), which is also a subjective measure (especially for private companies). In addition, the choice of adjustments to standard accounting methods have a significant impact on whether the company creates or destroys value in terms of EVA, and can lead to a certain degree of manipulation of the EVA calculation. In the case of the particular company reviewed, it was however found that these potential limitations were overshadowed by the benefits that can be gained from the increased focus on the creation of shareholder wealth that comes from the implementation ofEV A. It was concluded that should EVA be fully implemented at this particular company, it could form the backbone of the financial management and employee incentive system, guiding decisions made at all levels, and changing company culture so that every employee thinks and acts like an owner of the company.

AFRIKAANSE OPSOMMING: Hierdie navorsingsverslag het die konsep van Ekonomiese Toegevoegde Waarde (ETW) geevalueer, en ook die toepassing van ETW as prestasiemaatstaf by 'n spesifieke maatskappy ondersoek. Daar is gevind dat ETW sommige van die probleme wat geassosieer kan word met tradisionele maatstawwe van maatskappy prestasie (wins gebaseerde maatstawwe wat bereken word met die standaard rekenkundige metodes) kan oorkom. Hierdie maatstawwe is nie voldoende om die skepping van aandeelhouer welvaart te bereken nie, aangesien hulle nie die volle koste van kapitaal in berekening bring nie, en ook die ekonomiese realiteit van die maatskappy verwring. Daar is weI uitgewys dat ETW sekere beperkings het. Daadwerklike inspanning (asook gepaardgaande koste) kan nodig wees om 'n volle ETW implimentasie uit te voer, en die berekening van ETW kan ook baie tegnies wees. Die berekening word ook heweglik beinvloed deur die beta-koeffisient, wat op sy beurt ook 'n subjektiewe maatstaf is - veral vir privaat maatskappye. Gepaardgaande hiermee het die keuse van aanpassings aan die standaard rekenkundige metodes ook 'n groot impak op die eindproduk van ETW - of 'n maatskappy welvaart skep of vernietig. Dit kan op sy beurt lei tot 'n mate van manipulasie van die ETW berekening. In die geval van die spesifieke maatskappy wat ondersoek is in die navorsingsverslag was dit egter gevind dat die potensiele beperkings van ETW oorskadu word deur die voordele wat kan voortspruit uit die verhoogde fokus op die skepping van aandeelhouer welvaart wat gepaard gaan met die implementering van ETW. Daar was tot die slotsom gekom dat indien ETW ten volle implementeer sou word by die spesifieke maatskappy, dit die steunpilaar van die finansiele bestuur en werknemer vergoeding stelsel kan word, besluite op aIle vlakke kan beYnvloed, en die maatskappy se kultuur kan verander sodat elke werknemer kan dink en optree soos 'n eienaar van die maatskappy.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/20890
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