Economic value added (EVA) : the essence to creating real wealth?

Bottger, Richard (1999-11)

Thesis (M.Com.)--University of Stellenbosch, 1999.


ENGLISH ABSTRACT: Basic corporate finance and microeconomic theory indicate that the primary financial directive of any firm ought to be to maximise the wealth of the shareholders. This objective benefits all stakeholders and, also ensures that scarce resources are allocated, managed and re-deployed as efficiently as possible for the benefit of all. An appropriate performance measure gauges how management strategy affects shareholder value as measured by the risk-adjusted return on the invested capital. The effectiveness of this given strategy must incorporate the required rate of return on invested capital, accurately measure the amount of capital used by the company, and correlate highly with the risk-adjusted rate of return earned by shareholders. Economic Value Added (EV A) is considered an appropriate measure and is a way of measuring a company's net operating profit after tax and after deducting the cost of capital. In this study the EV A concept is considered from a financial management perspective. Several elements and advantages of the concept are discussed. The additional tasks required of management in this process are highlighted. It was found that one of the major challenges facing EV A implementation is changing traditional methods of financial reporting. In the theoretical study the major elements of EVA, in particular the advantages of the financial measurement, are discussed. Against this background an empirical investigation was carried out. The results of which provide an insight into the understanding and practical implementation of EV A by three large retail groups within South Africa. In conclusion to this study, the approach of EVA as a financial management system is the key to creating wealth based on the results of the practical and theoretical investigation.

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