What does EVA mean?

EVA(EconomicValueAdded) means economic added value. Its theoretical origin comes from a series of papers on the economic model of enterprise value from 1958 to 196 1 by Nobel Prize economists merton miller and Franco modigliani. In the most basic sense, economic added value is a measure of the company's performance. Unlike most other measures, EVA considers all the capital costs that bring profits to enterprises. \ x0d \ x0d \ economic added value-the function is as follows: \x0d\EVA has changed the defect that the accounting statements do not fully consider the cost of capital, and it can help managers to clearly understand the company's operating conditions, thus putting forward higher requirements for managers. EVA has powerful economic function and practical application value. To sum up, it is mainly manifested in the following aspects: \x0d\x0d\ incentive function \ x0d \: This is the primary and key function of EVA. Taking EVA as the core, designing the incentive mechanism for operators is conducive to standardizing the behavior of operators and safeguarding the legitimate rights and interests of owners and shareholders. \ x0d \ x0d \ has the following advantages compared with the traditional incentive mechanism: \ x0d \ x0d \ First, it helps to overcome the short-term behavior of operators. This is because in theory, EVA deducts the capital cost, which is an expected cost and a future cost. It takes into account the time value and risk factors of funds, which is bound to benefit the long-term behavior of operators. \ x0d \ x0d \ Second, it is conducive to strengthening supervision and reducing the possibility of making false accounts. On the one hand, the process of adjusting financial statements is itself a process of further strengthening audit supervision, from which it is convenient to find problems again and put an end to false accounts. On the other hand, one of the purposes of reasonable adjustment is to provide more useful decision-making information for operators, and the evaluation goal is no longer accounting profit, but EVA, so the necessity of false reporting and concealment is reduced. Just as the adjustment of R&D fees will not be detrimental to operators. \ x0d \ x0d \ Thirdly, strengthening the awareness of taking risks will help the operators' goals to be consistent with the owners' goals. Let the operator become a part of the owner, and the two goals can be consistent. EVA incentive mode has left a huge imagination space for the equity reform of listed companies in China. \ x0d \ x0d \ comprehensive function \x0d\EVA theory puts forward the concept of total cost management, which includes not only the operating costs that have occurred on the books, but also the capital costs that are easily overlooked and not fully reflected on the books. Ignoring the cost of equity capital is easy to ignore the interests of shareholders, and ignoring the cost of capital is easy to ignore the efficiency of capital use. When the change of business operation will increase the operating cost, but if it will reduce the capital occupation and thus reduce the capital cost by a larger amount, this change will reduce the accounting profit. \x0d\\x0d\ System function \x0d\ The company's comprehensive financial analysis system based on EVA can replace DuPont's financial analysis system which has been widely circulated so far. Among them, the relationship chain of purpose and means can help rib managers clear their minds and comprehensively point out the countermeasures and ways to increase EVA. The financial strategy matrix based on economic added value and sustainable growth rate provides help for the company's strategic financial decision, and EVA system is a useful tool for the company's decision. \ x0d \ x0d \ cultural function \x0d\EVA is not only a measure, but also a management concept and corporate culture. According to foreign practical experience, EVA should be simple and easy to operate, training should permeate every employee, and its assessment should be implemented at least to every department manager. The assessment cycle is not once a year, but a quarter and a month. Then, only after long-term unremitting efforts, the EVA corporate culture and organizational atmosphere recognized by all employees can the enterprise keep pace with the times with EVA! EVA is a symbol of enterprise success! \x0d\x0d\ There are certain advantages in evaluating financial performance with EVA indicators: \ x0d \ Considering the cost of equity capital \ x0d \ China's current financial accounting only recognizes and measures the cost of debt capital, but does not deduct the cost of equity capital from operating profit, so the calculated accounting profit cannot truly evaluate the company's operating performance. At the same time, it will also make operators mistakenly think that equity capital is a kind of free capital and ignore the effective use of capital. \ x0d \ x0d \ EVA can closely link shareholders' interests with managers' performance. At the same time, because the economic added value is an absolute value, using EVA can effectively solve the problem of decision optimization. Because the decision to increase EVA will inevitably increase the wealth of shareholders. For example, when the rate of return on investment is used as the performance evaluation index of department managers, department managers will give up investment opportunities that are higher than the cost of capital but lower than the current rate of return on investment, or reduce some assets with lower return on investment but higher than the cost of capital to improve the performance of their departments, but at the expense of shareholders. EVA can avoid the conflict between internal decision-making and implementation, and make the goals of each department consistent with those of the whole enterprise. (See the table below) \x0d\x0d\ can accurately reflect the value created by the company in a certain period of time \ x0d \ The traditional performance evaluation system takes profit as the main indicator to measure the business performance of an enterprise, and it is easy for operators to manipulate profits in order to whitewash their performance. However, in the calculation formula of EVA, the relevant contents of financial statements need to be adjusted appropriately to avoid accounting information distortion. Stern, the creator of EVA index? Stewart believes that the purpose of adjustment is to create a performance measurement method that allows managers to act like owners. Its specific purposes include: adjusting the influence of prudent accounting (such as capitalization of R&D expenses and first-in-first-out method), preventing earnings management (such as not mentioning bad debt provision), and eliminating the influence of past accounting errors on decision-making (such as preventing the book value of assets from being inflated). \x0d\x0d\ can solve the problems in decentralized operation of listed companies \ x0d \ The subordinate departments of the company can determine their own EVA financial targets according to their own capital costs, and these targets should be coordinated and supplemented through communication between departments. Each department can set long-term, medium-term and short-term goals for different financial purposes. The company headquarters can comprehensively set the company's EVA targets according to the company's overall planning, total assets and EVA indicators of departments. Therefore, many business problems, such as whether to accept new investment projects, how to determine the scattered business scope of the company, whether to give up a certain department or an investment, all depend on whether the shareholder value increases or not and whether EVA can be realized. \x0d\x0d\ can be used as a financial early warning indicator \ x0d \ First of all, EVA, as an indicator to create value, not only takes into account all the capital used by the company, but also makes full use of all the public information provided by the company, taking into account the risks and including the external market information of the enterprise. However, the traditional profit index depends entirely on the internal report information of the enterprise. Therefore, compared with traditional financial indicators, EVA has higher information reliability; Secondly, because EVA has made a series of adjustments to the current accounting policies, by changing the choice of accounting policies and changing the capital structure, the space for earnings management of enterprises has been compressed. Compared with traditional accounting indicators, it can more truly reflect the operating conditions of enterprises; Thirdly, compared with the traditional profit indicators, EVA can find out the poor operating conditions of enterprises earlier, especially in the case of scale expansion. \x0d\\x0d\ An effective incentive method \x0d\ At present, the salary system of most domestic enterprises is fixed salary system, which can not form effective incentives for operators. EVA incentive mechanism can measure the contribution of operators with the increase of EVA, and reward operators with a fixed proportion of this amount as a bonus, thus linking the interests of operators with the interests of shareholders and encouraging operators to create more value from the perspective of enterprises, which is an effective incentive method. \ x0d \ x0d \ can truly reflect the business performance of an enterprise. The biggest difference between \x0d\EVA and profit-based operating performance evaluation index is that it takes the cost of equity capital (opportunity cost) into the cost of capital, which is beneficial to reduce the distortion of economic efficiency caused by traditional accounting indicators, so as to evaluate the operating performance of enterprises or departments more accurately and reflect the operating efficiency of assets of enterprises or departments. \x0d\\x0d\ Concerned about the company's sustainable development \x0d\EVA does not encourage exaggerating short-term effects at the expense of long-term performance, nor does it encourage cutting R&D expenses. EVA focuses on the long-term development of enterprises, and encourages enterprise managers to make investment decisions that can bring long-term benefits to enterprises, such as the development and research of new products and the cultivation of human resources, so as to prevent the occurrence of short-term behaviors of enterprise managers. Therefore, the application of EVA is not only in line with the long-term development interests of enterprises, but also in line with the requirements of the era of knowledge economy, which is conducive to the progress of the whole social technology, the overall promotion of the core competitiveness of enterprises, and the acceleration of the adjustment of social industrial structure. \x0d\\x0d\ Resources:

Economic added value 2010019: 26124 October Source: China Economic Net Synthesis \x0d\ Remarks: Calculation formula of economic added value: EVA= = net operating profit after tax-cost of capital (opportunity cost) = net operating profit after tax-capital occupation × weighted average cost of capital rate.