Comparative study of Economic Value Added: A case study on five Indian companies

Abstract

Economic value added (EVA) is one of financial performance assessment method. EVA defined as the difference between NOPAT and cost of capital (Young & O’Byrne, 2001). The cost of capital is equal to the invested cost of capital (capital use) multiplied by the weighted average cost of capital (WACC). EVA is the residual income a company earns after capital costs are deducted. More specifically, it is operating profits minus the required dollar-amount return for the capital employed (Horne, 2002). EVA is not a new concept globally. It is based on residual concept that is calculated by deducting capital charges from the operating profits. One variation between EVA and residual income is to know how to work out on return and cost to get maximum return. Stern Stewart &Co. introduced this system in 1982.The list of some of the companies using EVA are Coca-Cola, Eliy Lily Monsanto and others. Companies adopted EVA by number of ways the initial interest was introduced a few years ago by a magazine article about EVA. . Idea of EVA has been given by Stern Stewart & Co, a New York based global financial consultant. Most of the companies consider the returns but not the entire cost they consider only the cost of debt and cost of preference shares. Management considers Equity as a cost free capital. In this situation shareholder returns are manipulative. Equity is a costly source of finance.