Application of Economic Value Added in Enterprise Development

Application of Economic Value Added in Enterprise Development

Economic Value Added (EVA) is a common word in enterprise performance evaluation, and on this basis, it has triggered a discussion on the evaluation system related to enterprise development in the industry. This paper mainly analyzes the application and advantages of economic added value in the development of enterprises in China through an overview of economic added value.

Keywords enterprise development; Economic added value; development prospect

At present, many enterprises in China choose to use the performance evaluation criteria such as ROE, ROE, net profit and return on total assets to evaluate [1]. The application of the above indicators can reflect the enterprise's own operating ability in the capitalized market environment to a certain extent, but the opportunity cost when investors have other choices is ignored in the process. The application of economic added value in enterprise development and management can lead to changes in relevant systems such as enterprise management decision-making, strategic planning and performance appraisal. By optimizing resource allocation, improving the utilization rate of related capital and creating enterprise value added, the strategic goal of enterprise sustainable development can be realized [2]. Especially on the premise of maximizing shareholders' wealth, the opportunity cost of equity capital should be considered when evaluating enterprise performance. The application of economic added value can effectively make up for the shortcomings of traditional evaluation indicators and correctly reflect the performance of enterprises, which is of great significance.

I. Overview of economic added value

Economic added value mainly refers to the economic indicators obtained by scientifically adjusting accounting profits and raising the total cost of capital based on the application of accounting statements, which can be used as the difference between capital gains and capital costs of companies or enterprises and belongs to the concept category of economic profits [3]. As an indicator of enterprise performance evaluation, economic added value can truly reflect the level of wealth creation of enterprise shareholders by management, which is closely related to the total capital cost and after-tax net profit of the enterprise. The calculation method of economic added value is to subtract the total cost of capital from the after-tax operating profit of the enterprise to get the result. Among them, after-tax net profit refers to the data obtained by accounting after adjustment and calculation on the basis of net profit, which mainly involves adjustment items such as R&D expenses, operating lease, depreciation and amortization, restructuring expenses and bad debt provision [4]. The total capital cost of an enterprise mainly includes equity capital, interest-bearing liabilities and other long-term liabilities. The application of economic value-added formula can be adjusted according to different enterprises to ensure the accuracy and authenticity of the final calculation results. If the calculated economic added value data is greater than 0, it shows that the value created by the enterprise has exceeded the expected standard of shareholders. The minimum standard means that the enterprise has relatively strong operating ability and real profit within the time range, which guarantees the investment interests of shareholders. If the economic added value is less than 0, it is pointed out that the actual profit level of the enterprise can not meet the minimum range of the remuneration due to equity investors, and even the profit calculated by traditional statements is greater than 0, but the actual result is that the enterprise is operating at a loss; When the economic added value is equal to 0, it shows that the profit level of the enterprise can just meet the minimum risk return of equity capital [5].

Second, the application of economic added value in the development of enterprises in China

199 1 value exploration (by Stuart) systematically expounds the theoretical framework of economic added value for the first time. European and American countries introduced the theory of economic added value into enterprise management system around 2000. In China, the theory of economic added value was officially recognized and applied by China enterprises after the United States and China companies jointly launched the List of Wealth Creation and Destruction of Listed Companies in China in 2003 [6]. Because the development of Chinese enterprises was in the stage of lacking value standards at the beginning of 2 1 century, the application of economic value-added management system can greatly change the corporate governance and management structure of China, and Chinese enterprises are facing large-scale reforms during this period, which provides a platform for the application of economic value-added management system in the development and management of Chinese enterprises [7]. Facts have proved that domestic enterprises will face losses once the cost of capital is deducted. At this time, the application of economic value-added management system can build a management system that can truly reflect the profitability of enterprises according to the actual development of enterprises, and provide reference for enterprise decision-making [8]. However, there are still some problems in the application of economic value-added system. The system of economic added value adapts to the development of enterprises in China, and the methods of economic added value are gradually improving. However, due to the lack of strong innovation ability in China's new market, China with economic added value can't adapt to China's existing market model. After investigating the application of foreign enterprises' economic value-added system, domestic large state-owned enterprises gradually accepted the economic value-added management system, which laid the foundation for the application of economic value-added in the development of enterprises in China. The revision of "Interim Measures for the Performance Appraisal of Heads of Central Enterprises in China" (2009) added the economic added value to the performance appraisal regulations of heads of central enterprises in China for the first time, and gradually expanded its application depth and scope. With the deepening of reform in the State Council, SASAC's work has shifted from enterprise management to capital management, and the focus of relevant assessment methods of state-owned enterprises has also changed, mainly emphasizing capital gains, and continuously paying attention to enterprise operation and sustainable value creation. The "Guiding Opinions on Strengthening the Value Management of Central Enterprises with Economic Value Added as the Core" (20 14) has put forward new requirements for the value management of economic value added. It is believed that a scientific, process-controllable, monitoring in place and comprehensive incentive and restraint value management system should be established within two terms of office to promote the transformation of economic value added from assessment indicators to management and promote the application of economic value added in enterprise development [9]. At present, China has fully promoted the theory of economic value added, and some private enterprises, especially listed enterprises, have begun to apply the economic value added management system.

Third, the value system construction of economic added value in enterprise development

The application of economic value-added management system in enterprise management mainly includes four aspects: performance measurement, management decision-making, incentive mechanism and business philosophy. Its application core is value creation, which drives innovation and development through the formation of enterprise incentive culture. Enterprises need to establish an economic value-added oriented assessment system, determine the proportion of economic value-added assessment according to the current development of enterprises by determining the target value, strengthen the promotion and improvement of economic value-added indicators, regularly carry out financial training, and standardize the construction of management systems. Enterprise managers form business ideas and values with the concept of economic value added as the core, and comprehensively analyze the industrial composition, performance and return on capital of enterprises by using economic value added indicators. On this basis, they make a strategic planning scheme suitable for their own enterprise development, dynamically test the implementation of the strategy, control the budget maximization, rationally allocate strategic resources and improve their competitiveness. The application of economic added value in enterprise development can satisfy shareholders' pursuit of wealth maximization, but it conflicts with the short-term interests concerned by enterprise management. In order to effectively alleviate the contradiction between enterprise owners and operators, we can set up medium-and long-term related incentives to improve the enthusiasm of managers and accelerate the realization of capital appreciation. The application of economic value-added system in enterprise development can unify its business philosophy and promote the rapid and healthy development of enterprises. The main basis of economic added value is financial data. By tapping the value drivers within the enterprise, breaking the hierarchical relationship within the enterprise with the help of the value chain ties, and strengthening the cooperation and exchange between various departments and posts, not only can the cohesion of the enterprise itself be improved, but also a corporate culture conducive to innovation and income increase can be better formed.

Fourthly, the importance of the application of economic added value in enterprise development.

The application of economic added value in enterprise development can create real value, because the traditional profit evaluation index can only confirm the cost of debt capital, and correspondingly ignore the cost of enterprise equity. In fact, when the profit calculated by enterprise accounting is lower than the minimum risk return required by shareholders, shareholders can completely reduce their investment and choose other projects with relatively high returns, so the traditional profit calculation indicators still have some shortcomings. The application of economic added value can adjust the cost of investment capital and calculate its economic profit, thus creating higher value for enterprises. Economic Value Added (EVA), as an indicator of enterprise performance evaluation, can integrate enterprise management decisions with financial principles, ensure the interests of managers and shareholders, consider the elements of equity cost, improve the enthusiasm of operators, create higher value for enterprises from the perspective of shareholders, and ensure the sustainable development of enterprises. According to the application principle of economic value-added assessment, the application of economic value-added reduces the possibility of artificially manipulating accounting profits, which is conducive to the long-term adjustment of R&D project expenditure by enterprise operators and the innovation and transformation of enterprises. The embodiment of economic added value in enterprises is mainly reflected in its market value. The application of economic added value can not only directly reflect whether the enterprise value has increased, but also correctly calculate its real market value, which is beneficial for investors to understand the enterprise value and prospects and make investment decisions accordingly, and can reduce investment risks and losses.

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