Business valuation based on economic value added (EVA). EVA (economic value added): formulas and calculation examples

With the help of the FinEkAnalysis 2019 program you can quickly carry out Assessment of economic added value.

An example of a report automatically generated by the FinEkAnalysis 2019 program.

Estimation of economic value added
CJSC "Arsenal" as of 01/01/2010

Economic value added is a measurement method financial condition company that calculates real economic income. EVA can be calculated as the difference between net operating income after taxes and the opportunity cost of invested capital.

The main idea and meaning of the EVA indicator is that the company's capital must work with such efficiency as to provide the rate of return required by the investor, shareholder or other owner on the invested capital.

Economic added value is calculated using the formula:

EVA = NOPAT – WACC x CE

where NOPAT is net profit according to financial statements taking into account necessary adjustments;

WACC – weighted average cost of capital;

CE - invested capital.

Economic added value arises in a company if, over a given period of time, it was possible to earn a return on invested capital higher than the investor’s rate of return.

A positive EVA value means an increase market value compared to the book value of net assets and an incentive for owners to make further investments in the enterprise. A negative one leads to a decrease in the market value of the company and the loss of invested capital by the owners due to the lack of alternative profitability. At zero EVA, the market value of the enterprise and the book value of net assets coincide, which means that the owner’s market gain is zero.

It is advisable to calculate EVA in 3 stages:

1) determination of the weighted average cost of capital;

2) making amendments to the profit and capital indicator;

3) determination of the return on invested capital, profitability spread and economic added value.

The weighted average cost of capital of Arsenal CJSC is 3.99% (see block "Calculation of the weighted average cost of capital")

Balance sheet adjustments are made to convert NOPAT and CAPITAL from accounting book value to economic book value. In Russian conditions, it is advisable to use an approach with a financial perspective to calculate NOPAT.

NOPAT calculation

Indicators	for 2008	for 2009
1	2	3
1. Profit available to ordinary shareholders	18364	21769
2. Financing costs and interest income	3981	2527
3. Interest expenses after taxes	3981	2527
4. Estimated interest on non-capitalized leases
5. Investment profit after taxes	-9081.24	-5854.28
6. Changes in capital equivalents	1444	-658
7. Increase in deferred income tax reserves	1061	-1007
8. Increase in provision for bad debts
9. Increase in deferred income	-37	-48
10. Increased spending on R&D and marketing research
11. Increase in reserves for upcoming expenses and payments	418	395
12. Depreciation of goodwill	2	2
13. NOPAT	32870.24	29492.28
14. Net profit	18364	21769

Features of the enterprise's accounting policy made it possible to make adjustments when calculating economic profit by the amount of: costs associated with financing and interest income, investment loss. In this regard, economic profit exceeded accounting profit by 7723.3 thousand rubles.

When calculating the CAPITAL indicator, the approach with an operational perspective seems to be the least labor-intensive.

CAPITAL calculation

Indicators	for 2008	for 2009
1	2	3
1. Total assets	153876	183030
2. Short-term financial investments	100	200
3. Unfinished construction	321	442
4. Accounts payable	42922	65046
5. Current value of non-capitalized lease
6. Capital equivalents	1218	1220
7. Provision for bad debts	1000	1000
8. Total amortization of goodwill	218	220
9. Net expenses for R&D and marketing research
10. CAPITAL	111751	118562
11. Equity, loans and borrowings and payments	110954	117984

In 2009, amendments made when converting the balance sheet value of the capital indicator into economic value increased its level by 578 thousand rubles.

Calculation of EVA indicators - menagment

In 2009, Arsenal CJSC earned a profitability that exceeded the investor's requirement by 20.91%. The increase in the market value of the enterprise over the book value of assets amounted to 24,791 thousand rubles. This encourages the owner to further invest in the enterprise.

One of the most well-known approaches to business valuation is the method based on the assessment of economic added value ( Economical Value Added, EVA), which shows the value added during the period, taking into account opportunity costs, and the amount of investment aimed at expansion that will add value in the future. Let's look at an example of a business valuation methodology based on EVA and the procedure for analyzing the obtained indicator values. In addition, the article presents formulas for determining the indicator EVA and given full interpretation their components.

Economic Value Added is a tool that shows how to measure, manage and influence profitability.

Before we begin to describe business valuation based on economic value added ( EVA), it should be noted that large Russian organizations are moving to a business management concept based on a cost approach ( Value Based Management, V.B.M.). system V.B.M. on upper level cost factors can be presented as follows (Fig. 1).

Rice. 1. System V.B.M. at the upper level of cost factors

Concept EVA often used as a more advanced tool for measuring the efficiency of departments, as opposed to net profit, due to the fact that EVA evaluates not only the final result, but also the price at which it was obtained, that is, how much capital was used and at what price. If the indicator EVA chosen by the organization as a criterion for assessing the effectiveness of its activities, then the task is to increase the value of this indicator.

Generally accepted indicators do not allow a complete assessment of the organization’s performance and accurately determine how much the owner’s capital costs and what income it brings.

The market value of an organization may exceed or be less than the book value of net assets, depending on the future profits of the organization and is determined by the formula:

Q= A + EVA,

Where Q— market value of the organization;

A - net assets (at book value);

EVA— economically added value of future periods, reduced to the present time.

Note that:

• If EVA= 0, the market value of the organization is equal to the book value of net assets. In this case, the market gain of the owner when investing in this organization is equal to 0;
• EVA> 0 means an increase in the market value of the organization over the book value of net assets, which stimulates owners to further invest funds in the organization;
• EVA < 0 говорит об уменьшении рыночной стоимости организации. В этом случае собственники теряют вложенный в организацию капитал за счет потери альтернативной доходности.

The main economic meaning of the indicator EVA is that the organization's capital must work with such efficiency as to provide the rate of return required by the investor, shareholder or other owner.

From the formula for economic added value we can derive relative indicator"Return on invested capital" ( Return on Capital Employed, ROCE). The economic meaning of this indicator is that economic added value ( EVA) arises if, over a given period of time, it was possible to create a return on invested capital ( ROCE) is higher than the investor's rate of return ( WACC). Investors (owners, shareholders) will not consider themselves satisfied if the return on their capital created by the organization has not reached the barrier rate of return they set. This principle of formation of the value of an organization is expressed in the following representation of the indicator of economic added value:

EVA = Spread × C.E. = (ROCE - WACC) × C.E.,

Where Spread— yield spread (the difference between the return on invested capital and the weighted average cost of capital). Represents economic value added in relative terms (in%);

C.E.— invested capital;

ROCE— return on invested capital. Defined as follows:

ROCE = NOPAT / C.E..

If Spread positive, this means that the company's profitability exceeds the profitability required by investors.

Next, let’s use a conditional example to evaluate a business based on economic added value. The source data is presented in the Balance Sheet and the Statement of Financial Results. The planning horizon is 3 years, while the growth rate of the main items of the Balance Sheet and the Financial Results Statement will not change and will amount to 23% per year.

For value management purposes, the most informative indicator is the market value of net assets, which allows you to determine the price at which a business can be sold. For our example, the calculation of net assets is given in table. 4.

Table 4. Calculation of the organization’s net assets in the balance sheet valuation, thousand rubles.
	Indicators	At the beginning of the period	At the end of the period	Change (+/-)
	Intangible assets
	Fixed assets
	Construction in progress
	Profitable investments in material assets
	Long-term financial solutions
	Others outside current assets
	VAT on purchased assets
	Accounts receivable
	Short-term financial investments
	Cash
	Other current assets
	Total assets
	Targeted funding and revenues
	Borrowed funds
	Accounts payable
	Debt to founders for payment of dividends
	Reserves for future expenses
	Other liabilities
	Total liabilities excluded from the value of assets
	Net asset value

As we can see, the value of the net assets of the organization under study increased over the period by 21,298 thousand rubles, or 19.45%.

The dynamics of changes in economic added value can be traced using a diagram (Fig. 2).

Rice. 2. Dynamics of economic added value

Thus, in our example EVA> 0, which means that the value of the organization is growing and the available capital is being used effectively. In addition, the organization’s capital ensured the rate of return on invested capital established by the owner of the organization and brought additional income(Additional cost). The value of ROCE > WACC indicates that the organization managed to earn added value during the analyzed period. The profitability of the organization exceeds the profitability required by the investor (there is a positive yield spread).

K. V. Zhelnova,
Candidate of Economic Sciences

The material is published partially. You can read it in full in the magazine

1. Added value as a tool for managing business value

Managing the value of companies is one of the most productive modern concepts management. The world's leading companies successfully manage business value in accordance with the system value-based management (Value Based Management, VBM) aimed at creating and increasing value based on its assessment and monitoring. VBM is most successfully implemented in public public companies, where an increase in stock price reflects a positive market reaction to business development results. It is more difficult to manage the value of closed companies.

Increasing the value of a business is in the long-term interests of its owners and other stakeholders. Owners of companies that manage their value increase their well-being while simultaneously helping to improve the well-being of the company's counterparties. Interaction with successfully developing companies is beneficial for consumers, employees, the state, and creditors - in a developed market, the capital of inefficiently operating companies will eventually go to their more successful competitors.

In the process of managing the value of a company, the main criterion for acceptance is management decisions acts as an indicator of cost. The value of the cost is assessed using various value added models. The content of added value is defined in the concept of residual income, based on the idea of ​​“residual income”, or added value, defined as the difference between the company’s profit and the cost of raising capital . The main types of value in the concept of value management are called added and will be discussed below.

In the process of managing the value of a company, the following main indicators of value are applicable:

2. Economic value added EVA: calculation formulas

Economic Value Added (EVA) is the simplest and most common indicator in a value management system, developed by B. Stewart and registered by Stern Stewart & Co.

IN basic version economic added value can be calculated using one of the following interrelated formulas (1) and (2):

EVA t = EBIT t – WACC × IC (t-1) (1)

• where EVA t -
• EBIT t — profit before interest and taxes received for period t;
• IC (t-1) – invested capital at the beginning of the t-th period according to the balance sheet estimate.

The main parameters of formula (1) are involved in calculating the return on invested capital ROI = EBIT / IC. Therefore, EBIT = ROI×IC. Then EVA = ROI×IC – WACC×IC = (ROI – WACC) × IC. Thus, the second formula for calculating EVA is:

EVA t = (ROI t – WACC) × IC (t-1) (2)

The main factors for the growth of the company’s value according to the economic value added (EVA) model:

• increase in profit (EBIT) with the same amount of capital (IC),
• reduction within certain limits in the amount of capital used (IC) at the same level of profit (EBIT),
• reducing capital acquisition costs (WACC) while increasing return on invested capital (ROI).

Benefits of using Economic Value Added (EVA):

• takes into account the cost of capital (WACC) as a weighted average of the costs of attracting various financial instruments;
• can be used to assess the efficiency of the company as a whole and its individual divisions;
• data driven accounting about the amount of invested capital (IC), as a result of which it is less subject to subjectivity. At the same time, to increase the validity of the calculations, the author of the methodology, B. Stewart, proposed making adjustments to the amount of the accounting estimate of the invested capital. According to some analysts, this leads to a decrease in the objectivity of calculations.

Application of the basic model of economic value added (EVA) allows you to estimate the value of a business from the perspective of all invested capital (Enterprise value, EV) - by summing up:

• book value of invested capital (IC)
• current (discounted) value EVA (economic value added) of the forecast period
• current (discounted) value of EVA for the post-forecast period

At the same time, the developer of the concept, B. Stewart, determines the need to introduce large quantity possible amendments and adjustments to the amount of net profit and the book value of invested capital.

In particular, in the process of managing the value of the company's own, the result of applying this model must be adjusted by subtracting the market value of long-term debt capital.

3. Olson, Edwards-Bell-Ohlson (EBO) models: calculation formulas

The Olson model is a modification of the basic model of economic added value, generated not by all invested capital (as in the basic model), but by the company’s own (shareholder) capital.

The Olson model calculation formulas presented in formulas (3) and (4) are similar to the formulas of the basic economic value added model (1) and (2):

• where EVA SI t -
• NI t –
• ROE t – return on equity in period t

Application of the Olson model allows you to estimate the value of a business from the position of equity capital using formula (6). For comparison, next to it is formula (5) - calculating the value of a business from the perspective of the total invested capital (Enterprise value, EV).

• where V IC – the value of the company in terms of total invested capital;
• EVA t - economic value added obtained during period t;
• WACC – weighted average cost of capital;
• IC – the amount of invested capital as of the valuation date at book value.V SI
• V SI - the value of the company in terms of equity capital;
• EVA SI t - economic added value attributable to equity and received for period t;
• NI t – net income to shareholders (netincome) received for period t;
• r e – rate of return on equity;
• SI (t-1) – the company’s net assets at the beginning of the t-period according to the balance sheet estimate.

Let's substitute expression (4) into expression (6) and assume t=0 - i.e. the company's value is calculated at time zero; then expression (6) will take the form of formula (7):

For purposes practical application the planning horizon is specified and forecast and post-forecast periods are distinguished. Direct revenue forecasts are generated for each year during the forecast period. At the end of the forecast period, the difference between the market and book value of the company is calculated.

Thus, formula (7) for practical use is as follows:

Formulas (7) and (8) represent EBO model (Edwards-Bell-Olson model)(Edwards-Bell-Ohlson EBO) or Olson model(James Olson articles 1990-1995)

Bases of fundamental indicators of Western companies contain forecasts of return on equity (ROE) for two next year; In this regard, some authors suggest limiting the process of applying Olson’s model to two years. Then formula (8) will look like this:

Thus, according to the Olson model, to determine the value of a company, it is necessary to predict the difference (ROE - r e). The cost of equity (r e) can be calculated using or.

Using the Olson model, calculate the business value of a company whose book value of net assets at the valuation date is equal to 100 units. The rate of return on equity is 15%. In the 1st year of the forecast period it is planned to receive a net profit of 25 units. and send 5 units to pay dividends. In the 2nd year of the forecast period, it is planned to increase the return on equity by 1.15 times compared to the 1st year of the forecast period.

Solution:

The book value of net assets at the end of the first year (SI 1), calculated on the basis of the book value of net assets on the valuation date (SI 0 = 100 units), profit of the 1st year of the forecast period (25 units) and dividends paid in the first year (5 units), amounted to 120 units. = 100+ 25- 5. Return on equity in the 1st year ROE 1 = (25-5)/ 100 = 0.2; in the 2nd year ROE 2 =0.2*1.15=0.23. Then, according to formula (9), the value of the company according to the Olson model will be 160 units.

Used sources:

Valdaytsev S.B. Business valuation and enterprise value management: Textbook. manual for universities. - M.: UNITY-DANA, 2001. - 720 p.
Kosorukova I.V., Sekachev S.A., Shuklina M.A. Cost estimate valuable papers and business (+ CD-ROM): tutorial. University series. – M.: Moscow Financial and Industrial Academy, 2011. – 672 p.
Business valuation: textbook / Ed. A.G. Gryaznova, M.A. Fedotova. – 2nd ed., revised. and additional – M.: Finance and Statistics, 2009. – 736 p.

, . .

IN general outline, the main idea of ​​the management concept economic added value company is that management should be aimed at ensuring growth in the market value of the enterprise and its shares. Those. all the company's aspirations, analytical methods and management techniques should be directed towards one common goal: to help the company maximize its value by basing the management decision-making process on key value factors. Due to their enormous practical significance, issues within the framework of the concept of value management have been widely reflected in scientific and practical research.

Employees of the consulting company made a great contribution to the popularization of this approach to management McKinsey. Book of company partners Tom Copeland, Tim Koller And Jack Murrin « Company value: valuation and management"became a bestseller of business literature in many countries of the world, including in Russia. We can also talk about the formation of a number of schools represented by various consulting companies (Stern Stewart & Co, Marakon Associates, McKinsey & Co, PriceWaterhouseCoopers, L.E.K. Consulting, HOLT Value Associates, etc.), promoting their own value management systems.

Significant contributions to the development of the EVA management concept have been made by Bennett Stewart. The result of the research was the book “ The quest for value: a guide for senior managers", published by Harper Business in 1990. The book was the result of the activities of the consulting company Stern Stewart & Co, founded by Stewart in the 80s, which has a registered trademark EVA (Economic Value Added). Let us dwell in more detail on the analysis of this concept.

The system of indicators characterizing the company's activities within the framework of the EVA management concept is constantly updated. With the introduction of modern information technologies, the emergence of new ideas, indicators become more objective and complex (Figure No. 1).

Figure 1. Tree of indicators used as part of company value management

EVA cost estimation and management method(Economic Value Added) is based on the concept of residual income proposed by Alfred Marshall, which, due to the actualization on the part of investors of issues related to maximizing income for shareholders, has become widespread.

The EVA (economic value added) indicator proposed by the consulting company Stern-Stewart is an assessment of the economic profit of the organization. Essentially, it is the profit earned by the organization reduced by the cost of capital.

The key question this metric helps answer is how successful are we in delivering returns to our shareholders?

EVA - Economic Value Added

This indicator is used as a mechanism for internally managing a company's operating activities and investment decisions to ensure that investors meet or exceed investor expectations.

EVA is a measure of economic returns that exceed investor expectations and, barring accounting anomalies, serves to directly compare companies with the same risk profile. Examples of anomalies include R&D and training costs; According to the theory, these are investments that should be considered as such.

The ability to accurately compare performance is based on the cost of capital. According to the EVA approach, organizations earn profits only when they include the cost of capital in the calculation of financial performance. Capital is never free. There is an opportunity cost of capital, i.e. investors can invest their funds in different instruments(government bonds, banks, etc.). To get the actual profitability of a business, it is important to subtract the cost of capital from profits. Capital is accounted for both debit and credit. Capital is the measure of everyone Money, invested and the company for the entire period of its existence, regardless of their source.

EVA is also actively used to set the size of incentive bonuses for managers. What is particularly interesting in our post-crisis world is that the bonus structure encourages a careful balancing of short-term and long-term financial results(which protects the interests of shareholders who have long-term investments to the enterprise). Moreover, the approach to calculating bonuses is being improved so that managers share the “sorrow and joy” of investors. As I said CEO one of the organizations that has implemented an approach to calculating bonuses for EVA based, “We want to make sure that the people who work (in this company) have the same goals as the people who invested in this company.”

The incentive payment model is based on a bonus bank. The way the bonus pot works is that each year the bonus amount is determined based on the EVA compared to its target value and this bonus is then placed into the bonus pot. Typically a third of this bonus is paid for this year, and the remainder is retained as payment for the risk of EVA falling in subsequent years.

It must be emphasized that employees should be rewarded for the results of the previous year, this will contribute to improvements in subsequent years. It is also important to note that bonuses are not necessarily paid when positive value EVA, since the trend may be downward. Conversely, if a division started the year with a significantly negative EVA but showed significant positive growth during the year, then bonuses may be paid even if the final EVA remains in the negative.

How to take measurements

Information collection method

The data is taken directly from the income statement and takes into account the cost of capital charge.

Formula

Economic Value Added = Net Operating Income After Taxes - (Cost of Capital × Capital Employed).

EVA = NOP AT - (C × K),

where NOPAT is net operating profit after taxes;
C is the weighted average cost of capital (WACC), which is the average rate at which the company expects to raise funds from shareholders to finance its assets; K - used economic capital.
The cost of capital in organizations is measured using the CAPM (Capital Asset Pricing Model) method. The company's nominal cost of capital is calculated as the sum of the basic risk-free rate of return and the β-coefficient of the asset's sensitivity to changes in market returns. Thus, the equity rate is the expected return of investors buying shares of the company. It is expressed as follows: Investors' expected return (future) = Risk-free rate of return (future) + company's β (relative measure of volatility) × Equity risk premium (history).
The equity risk premium represents the return above the risk-free rate of return that investors expect from investing in risky assets. So, if the risk-free rate of return is 7%, β is 1.1, and the implied risk premium is 4%, then the company's cost of capital will be: 7% + (1.1 × 4%) = 11.4%.
The cost of borrowing is the rate of return at which a lender provides borrowed funds. To determine this rate, it is necessary to calculate the profit. This is usually done using discounted cash flow analysis. The cost of borrowing must be calculated after taxes as follows: Cost of borrowing after taxes = Cost of borrowing before taxes x (100 - Marginal Tax Rate).

Measurement frequency

Economic value added is calculated on a monthly basis. The weighted average cost of capital is determined on an annual basis.

The source of information is the balance sheet data.

Collecting data to calculate economic value added requires slightly more effort than for other calculations. financial indicators. The more accessible the required data, the cheaper and faster the EVA calculation will be. If the data is available, then all you need to do is create a new formula in the accounting system. However, if important data is lost, restoring it can be very costly.

Target values

Performance in terms of economic value added can be assessed by comparison with the performance of organizations with a similar risk profile.

Example. Consider the example of a company that designs, manufactures and sells home furnishings (example taken from James Creelman's Building and Communicated Shareholder Value, London: Business Intelligence, 2000). All figures are in thousands of US dollars.

EVA is used as a way to evaluate an organization's investment. Let's take the example of a packaging line that is no longer meeting customer requirements. The new line will help the organization generate additional income as well as reduce packaging costs. The total effect is estimated to be an increase in profit after tax (net income) of £2 million. However, additional operating capital of £7.5m is required. Assuming a cost of capital of 11%, we obtain the following results:

• Increase in net income (NOPAT) - £2 million.
• The cost of additional operating capital (11% of 7.5 million) is £0.8 million.
• Economic value added = 2 - 0.8 = £1.2 million.

Notes

The introduction of EVA rather refers to changes in corporate culture than to finances. Organizations must ensure that they have created a culture in which economic efficiency much more important than just profit and loss.

Opponents of EVA argue that changing "accounting distortions" makes the method too complex. For this reason, some companies do not correct the "misstatements" but simply subtract the cost of capital from after-tax net operating income.

Moreover, making decisions based on estimated EVA values ​​may deter managers from making risky investments. Organizations need to decide on their risk appetite along with their preferred EVA values.

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