Economic added value. Economic Value Added (EVA) Model

Let's talk about this one important criterion enterprise value assessment as – economic added value ( Economic Value Added). Let's consider the formula for calculating this indicator, methods of its analysis and management. Let's conduct a comparative analysis with other approaches to company valuation.

Economic added value. Definition

In the modern economic environment, economic value added is an indicator of assessing the value of a company/enterprise for owners/shareholders.

Economic added value (EnglishEVA,EconomicValueAdded) is an indicator of the economic profit of an enterprise after paying all taxes and fees for all capital invested in the enterprise.

EVA vs Net Profit

Formula for calculating economic added value

Economic value added shows the excess of net operating profit after taxes and the cost of using capital. The formula for calculating EVA is given below:

NOPAT(English Net Operating Profit Adjusted Taxes) – profit from operating activities after taxes, but before interest payments ( NOPAT=EBIT (operating profit)–Taxes (tax payments));

WACC (English Weight Average Cost Of Capital) is the weighted average cost of capital, and represents the cost of equity and borrowed capital, that is, the rate of return that the owner (shareholder) wants to receive on invested money;

C.E. (English Capital Employed, Invested Capital, Capital Sum) – investment capital, is the sum of total assets ( Total Assets) based on the beginning of the year minus non-interest-bearing current liabilities (payables to suppliers, budget, advances received, other payables). In the balance sheet, investment capital is the sum of the lines “Capital and reserves” (line 1300) and “Long-term liabilities” (line 1400).

To calculate the weighted average cost of capital (WACC), we use the following formula:

Where: R e ,R d – expected/required return on equity and debt capital, respectively;

E/V, D/V – share of equity and debt capital in the capital of the enterprise;

t – interest rate of income tax.

What does economic value added show?

Economic added value shows the efficiency of an enterprise's use of its capital and shows the excess of the enterprise's profitability over the weighted average cost of capital. The higher the value of economic added value, the higher the efficiency of capital use of the enterprise. Efficiency is determined by exceeding profitability and cost of capital (debt and equity). Large EVA values indicate high standard additional profit on capital. Comparing the EVA of several enterprises allows you to choose the one that is more attractive for investment.

The EVA indicator reflects various categories of enterprise activity: investment attractiveness, competitiveness, financial stability, solvency, sustainability and profitability. The figure shows schematically the relationship between EVA and other enterprise characteristics.

Users of the indicator economic added value of the enterprise

The users of this criterion are shareholders, top managers, and investors who evaluate changes in EVA as an integral criterion for the economic attractiveness and efficiency of enterprise development.

Users	Purposes of use
Shareholders/Owners	Assessment of economic added value, analysis of the main factors of its formation, increasing its attractiveness to investors.
Top managers	Assessing the economic added value of an enterprise and developing management tasks, regulations, plans and standards to increase this indicator.
Strategic investors	Assessing the efficiency of an enterprise's use of its capital, carrying out mergers and acquisitions of promising companies.

Economic Value Added in the Value Based Management system

Based on the EVA indicator, the VBM enterprise management system is built ( ValueBasedManagement). This enterprise management system is based on maximizing economic added value. Everyone's goal management decisions in an enterprise is an increase in value for shareholders and owners. Finance serves to create a positive return on investment over invested capital. In this system, corporate governance serves to develop a system for measuring the contribution of managers to the growth of the company's value and a system for their material motivation and reward.

Economic studies on the importance of economic value added indicator

Thus, in her work, Gabriela Chmelíková (in 2008) proved that the EVA indicator has a strong correlation with such classic indicators as ROA and ROE. This proves that EVA is a better indicator of shareholder sentiment than traditional measures. Research by Klapper, Love, Jang, Kim (2005) proved that the EVA coefficient has a positive correlation with sales volume, leverage, age and company/enterprise size. A particularly strong influence on the EVA indicator is the corporate one, expressed by J. Tobin's coefficient (Q). These studies once again prove the importance of this indicator, which characterizes the efficiency of an enterprise.

Example of EVA calculation for OJSC ALROSA

In order to better understand the meaning of economic value added (EVA), let’s look at practical example How is this indicator constructed? Since all indicators are based on international reporting, they do not exactly coincide with domestic analogues. The result, in a simplified version, is the following formula:

EconomicValueAdded= Net profit – WACC*(Capital and reserves + Long-term liabilities)

The table below shows the calculation of EVA for the enterprise OJSC ALROSA.

The enterprise's net profit is taken from balance sheet line 2400 and is the final result of the organization's activities (NOPLAT).

The sum of “capital and reserves” and “long-term liabilities” forms the enterprise’s investment capital (CE).

To calculate WACC, you can compare ROE indicators (return on equity, level of profitability) for similar companies in the same industry. IN in this example The profitability of enterprise capital management (both own and borrowed) was taken at the rate of 10% per annum.

Economic Value Added = B4-B3*(B5+B6)

Control levers in the EVA model

Based on the above formula, we can identify the main levers and factors for managing economic added value (NOPLAT, WACC and CE):

increasing the profitability/profitability of the enterprise by increasing sales volume. This can be achieved by developing marketing strategies for product promotion. The second direction is reducing costs in the production of products through the use of new technologies, materials, raw materials, highly qualified personnel, etc.;
managing the cost of borrowed capital: reducing the interest rate through on-lending, obtaining an international/national credit rating;
capital management. Liquidation of low-profit assets, search for new areas of capital investment.

Summary

For the sustainable development of a company/enterprise, a single criterion for assessing value for owners is necessary, which allows one to link the strategic and operational levels of management. The economic value added (EVA) indicator is one of the most common indicators for an owner to assess the value of his business. Based on the EVA indicator, a VBM (Value Based Management) enterprise management model is built, where all enterprise indicators affect changes in added value. To stimulate managers in actions aimed at increasing value, based on this model, they are developing various systems assessment of contribution and monetary incentives.

A management concept based on economic value added (EVA) measures whether a company is earning enough compared to alternative investments.

Indicator of economic added EVA cost can be used to evaluate the performance of both the company as a whole and its individual projects or business units, so it is often compared with the net present value (NPV) indicator. However, from the point of view of assessing business performance, using the EVA indicator is more convenient, since it does not require an exact payment schedule, which is necessary when NPV calculation .

Example 1
$10 million must be invested in a 1-year project with an expected return of 8% per annum, that is, an operating profit after taxes and depreciation of $800 thousand. If the average cost of capital of the company is 10%, then the NPV of the project will be –182 thousand US dollars (–10,000 thousand + (10,000 thousand + 800 thousand) : (1 + 10%)), that is, it should be rejected.

Evaluating a project through EVA will lead to a similar result. The cost of capital must be subtracted from profit (800 thousand - 10,000 thousand × 10%), which will lead to EVA -200 thousand US dollars. After reducing EVA to today's value, as done when calculating NPV, we get -182 thousand US dollars (-200 thousand : (1 + 10%)).

Expert opinion Edgar Ragel, Director of Valuation Services at Ernst & Young
Using the calculation of economic added value EVA, you can evaluate the effectiveness of investment decisions within the entire company, while the NPV indicator is more applicable to assessing the investment attractiveness of individual projects. Another metric that EVA is often compared to is return on investment (ROI). However, ROI is usually determined based on financial statements and its value may be distorted, for example, depending on the accounting methods (LIFO, FIFO) that are used in the company. When determining EVA, such problems do not arise, since EVA is calculated on the basis of economic profit, the size of which does not depend on the chosen accounting method.

Calculation of Economic Value Added EVA

To understand which areas of business create economic profit and which do not, when setting up a management system based on the EVA indicator, the company is divided into management units. Their performance will be assessed based on the EVA value. To identify a management unit, the easiest way is to focus on the company’s existing budgeting system: added value can be determined by the central financial districts, for which the budget is drawn up, key performance indicators are calculated, and reporting is prepared. Business units (branches, stores, subsidiaries) or projects for the production of various goods or services can act as central financial centers. EVA can be calculated for different levels of management. For example, a distribution company may evaluate the economic profit of an individual branch, region, and company as a whole. If the center of responsibility is the company itself, then the business as a whole will be assessed.

At ROSNO, the EVA indicator began to be determined at the initiative of the foreign shareholder Allianz AG. Now EVA is a mandatory parameter, the value of which is taken into account when approving budgets of business units and making management decisions. At ROSNO, the business projects for which EVA is calculated are insurance areas - motor third party liability, life insurance, medical insurance, etc. (10 areas in total).

Reference

Economic Value Added Concept (economic value added - EVA) was developed in the 90s of the 20th century by specialists from the consulting company Stern Stewart & Co and quickly gained popularity among the world's leading companies. Its essence is that the company is considered as a kind of project with initial capital, which has a certain cost. The difference between the profitability of the project (company) and the cost of capital is economic value added (EVA). Thus, EVA is an indicator characterizing the economic profit of a company: how much the company will earn, taking into account the lost profits that it will not receive due to the inability to invest capital in an alternative way (in another business, on a deposit, in the stock market).

There are several interpretations of the formula for calculating economic value added EVA, which are obtained by arithmetic transformations of each other. We will consider the following form of this formula:

EVA = NOPAT – CC × CE,

where NOPAT (net operating profit taxes adjusted)- adjusted net operating profit after taxes;
SS (cost of capital)- cost of capital, which here refers to the interest rate that takes into account both the cost of borrowed funds and the cost of capital for shareholders;
C.E. (capital employed)- the amount of capital used.

Example 2
In the current period, the plant is considering two projects: for the production of milk and juice. Both projects can be implemented on the lines available at the plant. At the same time, the amount of investment in the dairy project will be 100 thousand US dollars, and the return during the year is planned to be 15 thousand US dollars. To implement the “juice” project, additional investments in packaging will be required, and the total investment amount will be 120 thousand US dollars. But the return will be higher and amount to 18 thousand US dollars. The cost of capital for the company is 12%. It is easy to see that the profitability of both projects is the same and amounts to 15% (15 thousand: 100 thousand) and (18 thousand: 120 thousand).

The EVA indicator for the first project is equal to 3 thousand US dollars (15 thousand - 100 thousand × 12%), for the second project it is equal to 3.6 thousand US dollars (18 thousand - 120 thousand × 12%). Accordingly, from the point of view of increasing the value of the company, it is necessary to choose the second project.

Determining the amount of capital for business projects at ROSNO is based on the sufficient capital model (capital adequacy model), developed by the international rating agency Standard & Poor.s. Using this model, for each level of an insurance company's credit rating, it is possible to calculate what the percentage of capital for each type of business should be. The credit rating of ROSNO shareholder Allianz AG is maximum (“AA”). For such companies, the share of capital involved in auto insurance projects should be equal to 8% of turnover, for health insurance - 12%, etc. ROSNO is guided by the same values.

EVA is calculated in our company as follows. Let the cost of capital (CC) be 12.8%; the income received as a result of the activities of the health insurance department for the year is equal to 500 thousand US dollars, while expenses amounted to 400 thousand US dollars. Accordingly, the profit is equal to 100 thousand US dollars (500 thousand - 400 thousand).

The required capital will be 60 thousand US dollars (500 thousand × 12%). This value shows how much equity capital must be allocated to this direction in order to generate an annual turnover of $500 thousand with a non-negative EVA value (that is, the profitability must not be lower than the market one).

EVA = 92.3 = (100 thousand – 60 thousand × 12.8%).

The EVA indicator helps to exclude projects that are profitable at first glance. If in the previous example, with revenue of $500,000, costs would be $495,000, the project would still be profitable. However, EVA = –2.68 = (5 thousand – 60 thousand × 12.8%), so the decision on the project must be negative.

Since Russian reporting often does not reflect the real results of the enterprise’s activities and does not allow obtaining full information to calculate EVA, it is better to use management reporting data to calculate all components of the formula. ROSNO uses reporting according to international standards to calculate EVA.

Let us consider the components of the formula for calculating economic added value EVA in more detail.

Net profit (NOPAT)

The amount of net profit is calculated based on the data in the profit and loss statement of the division, adjusted for capital costs 1:

NOPAT = Net profit before taxes + Interest payable + Interest on lease payments + Goodwill depreciation - Amount of taxes paid.

If we are talking about the activities of a business unit or a project, it is necessary to pay attention to the cost of products or services, which is deducted from profits when calculating NOPAT. The cost of a product or service of a division (project) consists of direct and indirect costs of its production, that is, the costs of the entire company to maintain the activities of this division, for example, rent office building, administrative resource, etc. Such expenses must be distributed among divisions (projects) in proportion to the degree of their use, for example, based on the share of the division’s turnover in the total turnover of the company, or gross profit, or the share of the salaries of the main production workers in the total wage fund and etc. However, if the share of indirect costs is large, then the proportional distribution of indirect costs will lead to an incorrect cost value. This problem can be solved using the operational costing method. Activity Based Costing(ABC) 2, which allows you to take into account resources (monetary, temporary, raw materials, etc.) at the place of use.

Capital size (CE)

The capital used to calculate EVA is the sum of all assets managed by a given business unit, minus short-term liabilities (to suppliers, budget, etc.), excluding short-term loans. Those assets that are centrally managed, such as common buildings, telecommunications, should also be included in the assets of the responsibility center in an amount proportional to the extent of their use.

Expert opinion
Edgar Ragel

There is another way to calculate capital, which should give a similar result - from the point of view of liabilities. The amount of all loans, the current value of leasing obligations and other long-term liabilities are added to the company's equity capital (common and preferred shares).

Cost of Capital (CC)

The cost of capital for a company is generally equal to the cost of capital for shareholders, that is, the rate of return they expect to receive on their money invested. At ROSNO, this indicator is determined by the company’s shareholders using the CAPM (capital assets pricing model) formula:

CC = Rf + bs × (Rm – Rf),

where Rf is the risk-free rate of return;
bs - b-coefficient for the insurance industry;
(Rm – Rf) - risk premium.

In practice, most companies use not only their own capital, but also borrowed capital. Therefore, when making management decisions, they proceed from the weighted average cost of capital (WACC - weighted average cost of capital) or use cumulative method 3 .

Expert opinion
Edgar Ragel

Alternative way calculating the discount rate is a cumulative method, according to which the total degree of investment risk is considered as the sum of individual risk factors. Typically, the major risk factors include the risk-free rate of return, the market equity risk premium, the industry risk premium, the small-cap company premium, and the company-specific risk premium.

The risk-free rate is calculated based on the yield on government bonds. Data on the value of premiums for the risk of investing in the stock market, industry risk and small capitalization of the company are calculated investment companies And news agencies. The most authoritative source for such information is Ibbotson Associates. It should be noted that in some cases the industry risk premium may be negative.

The amount of the premium for the specific risk of the company being valued depends on the appraiser’s subjective perception of the company’s overall investment risk.

However, the most popular and simplest is to determine the company's cost of capital based on expert assessments, that is, estimates of top managers, investment analysts, etc. At the same time, this method of assessing the cost of capital is also the most unreliable, so when using it it is necessary to choose the most cautious forecasts.

Personal experience
Sergey Pustovalov, Financial Director of JSC Talosto (St. Petersburg)

We calculated the cost of capital based on the CAPM model and, depending on the data used, we obtained a spread from 15 to 24%. As a result, the average value was taken for the cost of capital for the company - 20% per annum in foreign currency, which we were guided by when calculating economic indicators.

EVA value control

Using the EVA indicator, you can assess the quality of management decisions made. The positive dynamics of this indicator means that the company operates more efficiently than the market as a whole, that is, it is more attractive to investors, therefore, the market value of such a company increases 4. On the contrary, a decrease in EVA indicates that more interesting projects for investment are appearing on the market, therefore, when EVA falls, the value of the company also decreases. Since the main goal of management is to increase business value, managing economic added value comes down to ensuring a consistently non-negative EVA value, that is, ensuring an appropriate level of return on current assets and investments.

EVA management of existing assets is based on identifying factors that contribute to its increase, that is, profit growth (NOPAT), or a decrease in the size of capital and its cost (CC and CE) (see figure).

The work to increase NOPAT is to increase turnover, margins, increase asset turnover and reduce costs - both direct and indirect. All this is well known to financial directors of Russian companies. The task of minimizing the assets involved is new for Russian managers. To optimize the required capital, you should cooperate with the most reliable counterparties (for an insurance company, this could be reinsurance and investment agents), manage receivables and redistribute capital between business lines. At the same time, it is necessary to restrain the growth of businesses that require large capital investments and invest in areas that require less capital. This is exactly what ROSNO is doing now.

Managing a company's cost of capital comes down to working with lenders to attract cheaper loans and adjusting the capital structure. To do this, it is necessary to maintain a balance between the cost of own and borrowed funds. Thus, borrowing money often turns out to be cheaper than using your own funds.

In order to calculate the impact of certain management decisions on the EVA value, a conventional financial model of a business unit (project) or the company as a whole is used 5 . Economic value added is calculated for each management unit development option along with other indicators such as NPV. The decision to choose a specific project (development path) is made based on calculated value EVA.

Management of the economic added value of EVA projects is carried out by choosing methods of investing capital, the profitability of which will be higher than the company's cost of capital.

Expert opinion
Edgar Ragel

If the EVA value of a project, contrary to plans, becomes negative, then one should doubt the feasibility of this project. The profit that a company or project generates must in any case ensure the payment of interest on loans and a return on invested capital.

Profitability or growth

One of the most important problems that arise when solving management problems using EVA is to determine the relationship between the profitability of the company and the required business growth. The fact is that high value EVA and high growth rates are opposite values. The faster the business grows, that is, the more profits are reinvested, the lower the economic value added indicator will be.

Example 3
Let's say a company chooses which of the projects for the construction of new offices will be more profitable: in its city and in a neighboring region. The costs of the first project (1) in the first year are $100 thousand, while the profit will be $12 thousand. Since the company is almost unknown in the new region, the costs of the second project (2) will be higher and amount to $150 thousand, and the profit will be lower - $10 thousand. Cost of capital - 12%. Then EVA (1) = 0 (12 thousand – 100 thousand × 12%); EVA (2) = –$8 thousand (10 thousand – 150 thousand × 12%). Based on the EVA value, the company should select the first project. However, in this case, it will lose a new promising market and its growth will be more quantitative than qualitative.

(The example was prepared by the editors of the magazine.)

To solve this problem, competent strategic management of the company is necessary. When developing a strategy, the company's priorities at this stage of its development are always determined. From the point of view of the EVA concept, these priorities should be expressed in determining the acceptable limits of this indicator. When adopting a growth strategy, the EVA value may be negative over a certain period, but the business stability should not be lost. An economic profit of zero in this sense is a bet that balances the interests of shareholders and the level of investment.

Personal experience
Sergey Pustovalov

When setting up management using EVA, a reasonable question arises: who will compensate for the amount of lost profit if economic profit turns out to be negative - managers or shareholders? For shareholders this will mean a loss, but even if all managers are deprived wages, it is unlikely that this amount will cover the difference between the planned and actual EVA. It is unprofitable to fire managers because of one-time losses.

Expert opinion
Edgar Ragel

When deciding on the strategic development of a company, it is necessary to predict the period required for growth and evaluate EVA for this entire period. If the value of the indicator is not negative, then a decision can be made on development according to the chosen path. At the same time, the dynamics of EVA must be controlled so that by the end of the project its value reaches the required positive value.

How to get employees interested in increasing EVA

For efficient work To manage EVA, it is necessary that all managers who can influence the amount of added value understand which actions will lead to a positive effect and which to a negative one. Employees can be encouraged to increase added value using an appropriate motivation system.

The first thing you should be interested in is increasing EVA general director and top managers, that is, employees who can have the greatest influence on this indicator. Their annual bonus package can include a certain percentage of the total added value of the entire company or business area for which they are responsible. It makes no sense to link the remuneration of lower managers and ordinary employees to the value of the EVA indicator, since the cost of calculating the degree of their influence on the overall value added indicator will be higher than the bonus itself.

Stages of building control based on EVA

Stage 1. Bring the EVA ideology to management

It is necessary for managers to clearly understand that in their work they are using share capital, which has a certain value. This can be explained at special seminars or at general meeting heads of business areas. The goal of management should be to increase the capital of owners and ensure its profitability at a level not lower than that of the market as a whole. If one of the managers does not accept such an attitude, then, unfortunately, you will have to part with him.

Stage 2. Development of a methodology for calculating EVA

At this stage, it is necessary to develop a methodology for calculating the economic added value of EVA. It should include the following sections:

methodology for calculating net profit taking into account all adjusting indicators: the procedure for distributing indirect costs by type of business (business units), frequency of asset revaluation, etc.;
methodology for calculating the amount of capital;
the procedure for determining the minimum level of profitability for projects or groups of projects;
the procedure for assessing the EVA indicator, its frequency and the list of reports that should contain this indicator;
description of the staff motivation system based on EVA.

The methodology is developed with the direct participation of all managers directly responsible for creating the company's value, and must be communicated to each performer who can influence the size of the EVA of his responsibility center or the company as a whole.

Stage 3. Calculation of EVA “zero point”

After approval of the methodological part, the indicator of economic added value is calculated for all responsibility centers according to the latest year data using the cost of capital specified by the shareholders. You need to be prepared for the fact that if the cost of capital is determined correctly, then the results of work based on the results current year are likely to be mostly negative. This happens because in most Russian companies management strives for a current increase in profits, and not for increasing business value . Therefore, after receiving the first results, you need to analyze their causes and develop a plan to increase economic profit.

Thus, at ROSNO, when calculating EVA for various divisions for the first year, both positive and negative values were obtained. In order to change the situation, each contingent division needed to develop a program to increase economic added value. At the same time, the entire company faced the same task, so many actions to improve operational efficiency were carried out as part of general transformations. During 2002-2003, ROSNO carried out big job on description of business processes, implementation automated systems budgeting, brand development. The main goal was to simultaneously increase profitability and business growth (profitable gross), that is, EVA should not be below zero.

One of the main achievements in the use of EVA is the unification of the interests of shareholders and management in effective use capital. At ROSNO, managers concentrated on meeting targets for volume and profit, but did not think at all about the balance of their profit center (the capital invested in this business). EVA forces managers to manage the size and cost of capital, which is what shareholders want.

Expert opinion
Edgar Ragel

The use of EVA at Russian enterprises is very promising. Western companies often use this indicator to target managers to increase the value of the company's shares.

In Russia, due to the insufficient development of the stock market, managing a company from a value perspective was unpopular. However, in Lately attitudes towards the Russian stock market are changing. Russian companies are beginning to perceive the stock market not only as a tool for speculation, but also as a source of long-term capital, as well as an indicator of company value.

Now many Russian companies are striving to increase their openness and attractiveness of shares. In order to interest minority shareholders, it is necessary to convince them that the share price will rise over time. And linking managerial remuneration to the value of the company or the value of the EVA indicator will be a fairly weighty argument.

I would like to emphasize once again that no special difficulties should arise when calculating and using the EVA indicator. EVA is a financial instrument that is understandable, reliable and simple, and most importantly, it encourages managers to take action.

Example of using EVA

Anna Netesova, expert of the magazine "Financial Director"

How to manage a company using EVA may vary depending on the characteristics of a particular business. The Russian distribution company Avanta M 6 allocates its regional branches as EVA planning units. Moreover, every year any branch begins to work from scratch. It should be noted that the work system adopted at Avanta M is unique in its own way. Its effectiveness largely depends on the level of qualifications of personnel, including in the regions, as well as on the policy of the parent company in relation to branches.

Capital distribution

On fiscal year every business unit in mandatory a certain amount of money is allocated - this is its capital (other assets, including buildings, cars and equipment, do not apply to it). The head office allocates money to finance branches from its own funds and funds of business divisions and attracts from financial institutions.

There are three ways to finance branches: investment capital, overdraft and targeted loan.

Investment capital issued to branches for a year in a fixed amount. For the use of capital, the division pays the parent company 4% per month. To reduce the amount of investment capital and, therefore, the fee for it, it is necessary to return all or part of the capital in the form of profit. It is not possible to increase the amount of investment capital during the year.

Second type of financing - overdraft. It sets a fixed limit that the business unit cannot exceed, but only has to pay for the specific amount used under the overdraft at a rate of 5% per month. If a unit exceeds its overdraft limit, it will be charged a rate of three times the established rate (15%) for the excess amount.

Third way - targeted loan. The rate on it is determined individually, as well as the amount of the amount, but usually it does not exceed 3% per month. Targeted loans are issued either to finance transactions that will bring profit to the company in the future, but are currently not profitable (for example, purchasing your own store), or to carry out non-standard transactions (for example, purchasing real estate for an office in a city where this property cannot be obtained for rent). The decision to issue a loan is made at a meeting of the investment committee of the parent company.

The purpose of the branch is to return all invested capital with interest within a year. At the same time, the head office does not interfere in the operational work of the branch - it only sets the rules of the game for it.

EVA calculation

The net profit of a division is calculated as the difference between its income and expenses. The division's income is profit from the sale of goods, from the revaluation of inventories taking into account inflation and changes in the exchange rate (it is carried out monthly), as well as from the sale of non-core assets. Expenses include the cost of wages, office rent, warehouse services, the purchase of commercial products, marketing, as well as administrative costs for the maintenance of the central office, which are recorded as an absolute value at the beginning of the year for each division.

In order for the reporting of all divisions to be submitted in a comparable form and easily consolidated, the company has a uniform accounting policy and uses a common software. The articles in the reports are as detailed as possible: by business lines, by sales channels (distribution, wholesale), product brands, warehouses, etc. It should be noted that at the moment the software tools used in the company are not integrated - these are standard accounting and warehouse systems, as well as our own developments based on Excel and Access.

EVA is calculated for each business unit on a monthly basis based on management reports (income statement, management balance sheet, weekly sales data, daily account statements) submitted to head office, taking into account interest rates for all types of capital. When calculating the economic profit of divisions, the result of the revaluation of assets, as well as the costs of servicing each type of capital, are subtracted from net profit:

EVA = (NOPAT – Revaluation Amount) – 4% × IR – 5% × OD – 3% × CC,

where NOPAT is net profit adjusted by the amount of revaluation;
IC - the amount of investment capital of the division;
OD - the size of the overdraft used by the division;
CC - the size of the target loan.

The parent company strives to ensure that the value of the EVA indicator is non-negative even as the branch grows. The norm is a zero value of this indicator. If it is above zero, then the managers of the corresponding business unit are rewarded from the economic profit received.

In the event that the EVA value is negative for several periods, a specially created commission goes to the site to find out the reasons for this result. In most cases, such situations arise due to dishonest work of managers and lead to a change in branch management.

The parent company collects statistical data for all cities in which it has divisions and can conduct a comparative analysis of demand for products, which with a high degree of probability makes it possible to identify objective reasons for a negative result.

Employee motivation

Bonuses to top managers are determined based on the excess of the actual EVA value over the planned one. Such managers include general and commercial (financial) directors of branches, that is, those managers who generate income and manage expenses. Typically, payments go from 7 to 15% of the indicator; the amount of the bonus depends on the number of top managers in a given branch. The remuneration of top managers at the head office depends on the economic profit of the company as a whole.

In addition, the company periodically identifies the highest priority areas of development and part of the bonus depends on work in these areas. For example, if it is necessary to focus on selling the products of one of the partners, then a special sales plan is drawn up for the branches. If it is fulfilled, branch employees are awarded from the corporate bonus fund.

There is also a break-even bonus. If a business unit does not have a negative EVA value for a certain time, then its head is awarded a bonus.

Payments to mid- and lower-level employees depend on the achievement of more local goals. For example, sales representatives do not directly influence EVA, so their compensation does not depend on its value. However, they can influence the volume of shipments to stores (which is reflected in added value), and bonuses for such representatives will be calculated based on this indicator, as well as on the size of the trade allowance and the priorities that the manager sets for them for the current month. Deductions from wages are also possible, for example, for returns of goods and overdue accounts receivable from stores assigned to the representative. The motivation system for service employees - logistics workers, warehouse workers, freight forwarders, etc. - is built in a similar way.

Motivational indicators of top managers are not revised during the year. Employee bonuses are more than low level may vary depending on the state of affairs in the department.

The entire bonus fund is divided into two parts. Less than half of the total bonus amount is paid to top managers monthly, and the bulk of the amount is paid at the end of the year. This is done in order to interest specialists in the final result. Thus, the company avoids speculation on the amount of contingent profits. Wherein monthly bonus, like the annual one, reduces the size of the division’s capital, since it is paid out of its profits, but it cannot be abandoned. As a result, the more a division earns, the more its managers receive and the more it gives to the parent company, which, according to the management of Avanta M, is quite fair.

At the end of the year, after bonuses are paid to managers, the remaining EVA ceases to be the business unit’s own funds and turns into investment capital, which the head office can redistribute between business units.

_______________________________________________
1 The authors of the EVA concept have developed about 150 amendments that can be applied to the net profit indicator to obtain NOPAT, depending on the characteristics of a particular company. On average, companies using EVA use about 10 of them. – Note editors.
2 For more information on how to create a cost calculation system based on ABC at an enterprise, see the article “Determination of cost using the Activity based costing method”, “Financial Director”, 2003, No. 7–8. – Note editors.
3 For more information about calculating the cost of capital, see the article “Calculation of the discount rate”, “Financial Director”, 2003, No. 4. – Note editors.
4 It should be emphasized that we are talking specifically about the dynamics of the indicator, since positive value EVA in the current period can be achieved by reducing costs such as working capital, wages, sale of assets. As a result, EVA will drop sharply in the next period.
5 For more information about building a financial model of a company, see the article “Model for assessing the value of a company: development and application”, “Financial Director”, 2003, No. 12. – Note editors.
6 Company name has been changed.

Elena Larionova
consultant on financial analysis and planning of the group "Voronov and Maksimov", lecturer at the Faculty of Economics of St. Petersburg State University
http://www.vmgroup.ru/

In recent years, foreign publications have paid increasing attention to approaches to assessing the efficiency of an enterprise. Among such approaches is an approach based on the construction of balanced score cards (BSC) and determining the efficiency of a business based on an analysis of its various aspects reflected in balanced cards; another approach is determining how profitable a business is from the position of the owners of the enterprise. The problem of determining profitability is solved by calculating the indicator of economic added value. This figure in foreign literature denoted by EVA (economic value added). It has so far been little described in the domestic literature. It is precisely because of its importance for assessing the efficiency of an enterprise that this article will focus on it.

Economic value added ( EVA) represents the enterprise's profit from ordinary activities minus taxes, reduced by the amount of payment for all capital invested in the enterprise.

The indicator is used to assess the efficiency of an enterprise from the position of its owners, who believe that the activity of the enterprise has a positive result for them if the enterprise managed to earn more than the return on alternative investments. This explains the fact that when calculating EVA, not only the fee for using borrowed funds, but also equity capital is deducted from the amount of profit. It can be argued that this approach is more economic than accounting.

In practice, EVA is calculated as follows:

EVA = profit from ordinary activities - taxes and other obligatory payments - capital invested in the enterprise, i.e. balance sheet liability amount)* weighted average cost of capital (1)

Developing formula (1), we can show the calculation of the EVA indicator as follows:

EVA = (P - T) - IC * WACC = NP - IC * WACC = (NP / IC - WACC) * IC, (2)

Where:
P- profit from ordinary activities;
T- taxes and other obligatory payments;
IC- capital invested in the enterprise;
WACC- weighted average cost of capital;
NP- net profit.

EVA = (NP/IC - WACC) * IC = (ROI - WACC) * IC, (3)

Where:
ROI- return on capital invested in the enterprise.

From formula (3) it follows that important role When calculating the EVA indicator, the structure of sources plays a role financial resources enterprises and price sources. EVA allows you to answer the question of the company's investors: what type of financing (own or borrowed) and what amount of capital is needed to obtain a certain profit. On the other hand, EVA determines the line of behavior of the owners of the enterprise, directing investors' capital to the enterprise or vice versa, promoting their outflow to enterprises that provide higher rates of profitability.

In formulas 1-3, to determine the EVA indicator, you need to know the weighted average cost of capital WACC. The weighted average cost of capital can be calculated using the following formula:

WACC = PZK * dZK + PSK * dSK, (4)

Where:
PZK- price of borrowed capital;
dZK- share of borrowed capital in the capital structure;
PSC- price of equity capital;
dCK- share of equity capital in the capital structure.

Essence of EVA is manifested in the fact that this indicator reflects the addition of value to market value enterprises and assessing the effectiveness of the enterprise by determining how this enterprise is valued by the market.

Market value of the enterprise = net assets (at book value) + deferred EVA, reduced to the present time (5)

In accordance with formula (5), the market value of an enterprise may exceed or be less than the book value of net assets, depending on the future profits of the enterprise. The EVA value determines the behavior of the owners of the enterprise in relation to investing in this enterprise.

Let's consider the following three options for the relationship between the value of the EVA indicator and the behavior of owners:

1. EVA= 0, i.e. WACC= ROI and the market value of the enterprise is equal to the book value of net assets. In this case, the owner's market gain from investing in this enterprise is zero, so he wins equally by continuing operations in this enterprise or investing in bank deposits.
2. EVA>0 means an increase in the market value of the enterprise over the book value of net assets, which stimulates owners to further invest funds in the enterprise.
3. EVA<0 leads to a decrease in the market value of the enterprise. In this case, the owners lose the capital invested in the enterprise due to the loss of alternative profitability.

From the relationship between the market value of the enterprise and the EVA values, it follows that the enterprise must plan future EVA values to guide the actions of the owners in investing their funds.
The expectation of future EVA values has a significant impact on the growth of the company's share price. If expectations are inconsistent, the stock price will fluctuate, and in the short term it will not be possible to draw a clear relationship between EVA values and the company's stock price. Therefore, the task of planning profit, and with it planning the structure and price of capital, is the primary task of enterprise management. The more professional the management of an enterprise is, the higher, other things being equal, are the values of the EVA indicator and the accuracy of planning. This explains the fact that in large Western enterprises, EVA values are the basis for bonuses for managers, who become more interested in increasing the profitability of the enterprise and the growth of EVA. In this regard, EVA acts as the basis of motivation.
The EVA concept is often used by Western companies as a more advanced tool for measuring the performance of departments than net profit. This choice is explained by the fact that EVA evaluates not only the final result, but also the price at which it was obtained (i.e., how much capital was used and at what price).

Returning to formula (1), we can outline ways to increase the EVA indicator:

1. Increase in profit while using the same amount of capital;
2. Reducing the amount of capital used while maintaining profits at the same level;
3. Reducing the cost of raising capital.

Separately, we can highlight the reduction of taxes and other obligatory payments within the framework of tax planning, using various schemes allowed by the legislation of the Russian Federation.
The identified ways to increase EVA are implemented in specific activities carried out by enterprises. If the EVA indicator is chosen by an enterprise as a criterion for assessing the effectiveness of its activities, then the task is to increase the value of this criterion. Such an increase occurs both as part of the reorganization of the enterprise (see Table 1) and as part of current management activities.

Table 1: Activities aimed at increasing the efficiency of the enterprise

Performance evaluation criterion

In general, to summarize, we can outline the role played by the indicator of economic added value in assessing the efficiency of an enterprise:

EVA acts as a tool that allows you to measure the actual profitability of an enterprise, as well as manage it from the position of its owners;
EVA is also a tool to show business managers. how they might affect profitability;
EVA reflects an alternative approach to the concept of profitability (moving from the calculation of return on invested capital (ROI), measured in percentage terms, to the calculation of economic value added (EVA), measured in monetary terms);
EVA acts as a tool for motivating enterprise managers;
EVA improves profitability primarily by improving the use of capital rather than by focusing its efforts on reducing the cost of capital.

Thus, it can be assumed that the use of the EVA indicator in management accounting will help improve the quality of assessing the performance of Russian enterprises.

Economic value added (EVA) is the real economic profit that belongs to shareholders after deducting all operating expenses (including taxes) and financing costs. Since EVA is the official trademark of Stern Stewart Management Services of New York City, another term, Economic Profit (EP), is often used.

EVA = (return on capital - cost of capital) x (investment capital).

For example, a firm's return is 10% on $1 million and its cost of capital is 11%, then:

EVA = (10%-11%) * 1,000,000 = - $10,000

This example shows the importance of EVA. A 10% return may sound "optimistic", but it is less than the company's cost of capital, and EVA objectively shows that the value added in this example is negative.

EVA vs other economic indicators.

In fact, EVA is not a new idea, the concept is very closely related to the concept of “residual value”, first introduced by Alfred Marshall in 1980. It is also close to the concepts of discounted cash flow (DCF) and net present value (NPV).

As follows from the above example, this indicator (EVA) is better than “income” or return on assets (ROA), because these two measures do not take into account the cost of capital.

Difficulties and disadvantages.

The definition of EVA is based on the cost of capital, its return and investability, and assumes that you can measure them. In practice, there are certain difficulties. For example, if you measure investment capital based on book value, you will understate the true value of assets.

Almost all accounting indicators have certain shortcomings, often to a greater extent than is acceptable for an objective assessment, and the use of EVA leads to the same difficulties. The reliability of this metric deteriorates if you try to use it for each business unit, because you will face the inevitable problem of overhead allocation. Calculating EVA will require significant effort on the part of your accounting department.

In addition, EVA is an indicator that refers to the past. If you make an investment that won't pay off for a number of years, the EVA will be negative until the investment starts making a profit. Like profit, EVA is a short-term indicator not focused on a long-term strategy.

EVA ignores the value of real options (or, more often, incorrectly values them at 0).

EVA and personnel management.

Very often, EVA is positioned as the best indicator for calculating bonuses. It has a number of advantages for use over such an indicator as “income”, because includes the cost of capital.

Additionally, traditionally, managers want to maximize investment in their divisions, and if their compensation is dependent on EVA, they will only want additional investment if EVA is positive.

Is EVA really that good?

It's hard to understand the hype that has existed around EVA over the past decade. EVA was positioned as the best way to bring together the interests of workers and business owners. This is actually not that true. We prefer the more robust approach developed by Kaplan and Norton. In any case, any social scientist knows that “bonuses” are just one small part of an effective behavioral management system.

As noted earlier, EVA, like all other indicators, has a certain set of limitations and shortcomings that make it far from perfect.

EVA is the same tool as FIFO or LIFO - however, there is no excessive hype around these methods. However, no one denies its usefulness in business and personnel management, but it is important to understand all its limitations and not idealize it.

Translation: Eputaev Ian

EVA (Economic Value Added)- economic profit is one of the most important indicators in assessing the production efficiency of a company. Reflects economic value added. EVA indicator usually assessed for one reporting period (quarter, year, less often - month) and reflects economic profit after paying taxes, interest on attracted and equity capital (invested during the period).

EVA calculation algorithm

Net operating profit NOPAT is reduced by the amount of payment for the use of own and attracted (borrowed) capital.
Economic sense of EVA is that the enterprise must not only ensure break-even operation (more about calculating the break-even point), including return on investment, but also create additional value (the classic school calls it added value).

Methods and formulas for calculating EVA

In practice, there are many ways to calculate EVA, here are some of them:

EVA = (RENT-WACC) * SOS = NOPAT - WACC*SOS
Where,
RENT - return on investment, calculated RENT = NOPAT/SOS;
WACC - weighted average cost of capital;
SOS - own working capital (capital employed) = total assets - current liabilities.

EVA = NOPLAT - NZK = NOPLAT - IC * WACC
Where,
NOPLAT - net operating profit indicator;
NZK - normal capital costs;
IC - volume of investment.

In the reports of the largest Russian companies, a formula that takes into account ROCE indicator- return on invested capital. EVA calculation logic in this case is simple - economic profit arises only if the company managed to achieve a return on invested capital exceeding the weighted average cost of capital.

EVA = (ROCE - WACC) * IC = SPREAD * IC
Where,
SPREAD - the difference between ROCE and WACC.
If SPREAD > 0, then the company's profitability exceeds the predicted profitability of investors (initially set based on the cost of capital WACC).

EVA Formula by B. Stewart

Without exception, all formulas and methods for calculating economic added value are based on B. Stewart's formula, which looks like this:

EVA = NOPAT - WACC * IC

In order to maximize the accuracy of the EVA calculation, Stewart proposed using 164 indicator adjustments, but nevertheless, to simplify management reporting, he used only a number of the most significant adjustments.
Model EVA is one of the most common models in assessing the value of an enterprise. It is the assessment of operating activities over a significant period of time that can give the most accurate result in assessing the company. It is assumed that a normative target value will be set to monitor the activities of all departments of the enterprise. EVA assessment is transparent both for the company's management and for its shareholders and creditors. Analysis of the indicator of economic added value by division can identify the most valuable and profitable products for the company, on which it is worth focusing attention and into which to direct the vast majority of investment funds.

Disadvantages of the EVA method and model

The main disadvantage of the method for assessing economic added value is the calculation using many possible formulas (given above). Due to the difference in calculation methods, we cannot objectively compare two companies in terms of EVA without knowing which calculation method was used to evaluate the indicator in each company.

Stages of implementing the EVA management model in an enterprise

Stage 1. The first step is to draw up a long-term development strategy for the company. Alternative strategies are analyzed and the most attractive and appropriate to the market situation is selected.
Stage 2. Introducing managers to EVA ideology. The vector is set on long-term goals, on the growth of economic added value. The rational use of resources in areas of activity is monitored.
In general, we need to strive for profitability ROCE exceeded the cost WACC.
Stage 3. Development of a unified methodology for goal setting and evaluation of the result according to EVA. Formation of basic models and accounting of indicators involved in the formation of economic added value. Methods for calculating all indicators that have many calculation formulas are determined.
Stage 4. Implementation into operational activities. EVA is included in the list of indicators that are assessed in the analysis of the company's operating activities.