What are the advantages of eva over traditional performance evaluation metrics in terms of performance evaluation? What are the disadvantages

The essence of EVA is the "economic" profit generated by business operations. In contrast to the "accounting" profits that people emphasize, the EVA concept holds that there is a cost to shareholders' capital, so the cost of equity must be taken into account when measuring the performance of an enterprise. Economic Value Added (EVA) Economic Value Added (EVA) reflects the total amount of value-added income received by shareholders from operating activities over a certain period of time, and it is the value-added income after deducting the opportunity cost of shareholders' equity from the interests of shareholders. Compared with the profit indicator, EVA has the following advantages:

First of all, EVA emphasizes the link between shareholders' wealth and corporate decision-making, which can avoid the confusion of multi-objective decision-making. In order to effectively increase shareholder wealth and incentivize corporate managers, many companies use a series of indicators to combine their financial goals, because a single indicator is often biased. The result of using a series of indicators for simultaneous evaluation is that the inconsistency of multiple criteria often leads to the incoherence of the company's plans, business strategies and business decisions . In contrast, the Economic Value Added (EVA) indicator links all of the company's objectives with a single financial indicator, and as long as a particular decision results in an increase in EVA, then that decision is the most correct.

Secondly, EVA provides a new way of evaluating shareholders' value and its growth, i.e., the growth of shareholders' value comes from the growth of the enterprise's economic value added rather than the growth of profits. According to the capital asset pricing model and the definition of Economic Value Added (EVA), the market value of a company has the following relationship with EVA without considering inflation:

Market Value = Total Equity Capital + Present Value of Expected Economic Value Added (EVA)

The present value of a company's expected EVA is also known as Market Value Added (MVA). For the shareholders, the increase in their wealth lies in the increase in market value added. Obviously, if the economic value added increases, the market value added of the company also increases, while an increase in profits does not necessarily bring an increase in economic value added, that is to say, an increase in profits does not necessarily bring shareholders more wealth than the opportunity cost. Therefore, to study whether there is any increase in the value of the company's shareholders, we should observe the growth of EVA, without taking into account the growth of profits.