Why is EVA (Economic Value Added) increasingly valued in business? What are its advantages and disadvantages over other financial indicators?

Answer: EVA is a method of evaluating the financial performance of a company based on net operating profit after tax and the total cost of capital investment required to generate that profit.

EVA (Economic Value Added) helps company managers create more wealth - for shareholders, for customers, for employees, and for themselves. We do this by guiding the development of EVA-based financial management systems and employee incentives. Our economic value-added programs are used by more than 300 companies around the world and continue to deliver impressive results in terms of business performance, momentum, and market performance.

Benefits:

1. EVA changes behavior

2. EVA is a comprehensive measure of factor productivity

3. EVA helps you to better weigh the pros and cons

4. It prevents you from losing sight of long-term growth for the sake of getting an annual payout

5. It establishes the principle of efficient resource allocation

6. The shortcomings:

1. Historical limitations of EVA indicators

EVA indicators are short-term financial indicators, although the use of EVA can effectively prevent managers from short-term behavior, but managers have a certain term of office in the enterprise, in order to their own interests, they may be concerned only about the EVA of each year of their term of office, however, the shareholders' wealth Maximizing shareholder wealth depends on the economic value added created by the enterprise in future periods. If only the realized economic value added is used as a performance rating indicator, corporate managers, in their own interest, will be less motivated to maintain or expand market share, reduce unit product costs, and make necessary investments in research and development (R&D) projects, which are the key factors to ensure the sustained growth of the enterprise's future economic value added. From this perspective, market share, unit product costs, and R&D project investment are value-driven factors for enterprises, and are "ahead of the curve" indicators for measuring enterprise performance. Therefore, when evaluating the business performance of managers and determining their compensation, it is important to take into account not only the current EVA indicators, but also these forward-looking indicators, so as to incentivize managers to align their decision-making behavior with the interests of shareholders. Similarly, when using EVA for securities analysis, it is also important to fully consider these forward-looking indicators that affect the future EVA growth momentum of the enterprise, so as to assess the investment value of the stock as accurately as possible.

2, the limitations of the information content of EVA indicators

In the use of EVA performance evaluation, the EVA system does not pay enough attention to non-financial information, and can not provide non-financial information such as products, employees, customers and innovation. This is very reminiscent of the Balanced Scorecard (BSC). Considering the advantages and disadvantages of EVA and BSC, it is possible to integrate EVA metrics with the Balanced Scorecard to create a new type of "EVA Comprehensive Scorecard". Through the decomposition of EVA indicators and sensitivity analysis, we can identify the indicators that have a greater impact on EVA, so that other key financial and non-financial indicators can be closely linked to EVA as a measure of corporate value, forming a cause-and-effect chain that runs through all aspects and levels of the enterprise, and thus constituting a new type of "balanced scorecard". "EVA is placed at the top of the integrated scorecard, at the final link of the causal chain in the balanced scorecard, and the development strategy and business advantages of the enterprise are all in the service of realizing the overall goal of EVA growth, which is the primary goal of the enterprise and the criterion of success. With this goal in mind, the business plans of the company and its divisions are no longer idiosyncratic, but must be integrated into the process of improving EVA. Here, EVA is like the compass on the scorecard around which all other strategies and metrics operate.

3, the limitations of the formation of the reasons for EVA indicators

EVA indicators belong to the next kind of business evaluation method, purely reflecting the operation of the enterprise, focusing only on the enterprise's current operation, does not reflect the market correction of the company's entire future operating earnings forecast. The market value of the company in the short term, will be affected by many factors other than operating performance, including macroeconomic conditions, industry conditions, capital market capital supply conditions and many other factors. In this case, if we only consider the EVA indicator, sometimes it will be biased. If the stock price evaluation is combined with EV indicators, it will reflect the company's operating performance as well as its development prospects more accurately. First of all, after adopting the EVA indicator, the evaluation of operating performance can better reflect the actual operating situation of the company, that is, the stock price can better reflect the actual situation of the company. Secondly, the combination of the two can effectively combine the business evaluation method and the market evaluation organically, and accurately reflect the business performance of the top management.