EVA/ Residual Income-
- Creating value for shareholders is now widely accepted as the dominant corporate objective.
- Fortune magazine called it “Today’s hottest financial idea and getting hotter”
- Management Guru Peter Druker called it “It is a measure of total factor productivity.”
- EVA is essential the surplus left after making an appropriate charge for the capital employed in the business.
- Formula-
- EVA= NOPAT – (ko x capital employed)
- EVA= PAT – ke. Equity
- EVA= Capital (r – ko)
Where,
EVA= Economic Value Added
ko= cost of capital [weighted average cost of capital]
r= return on capital
NOPAT= net operating profit after tax
PAT= profit after tax
- Steps for Implementing EVA
Develop top management commitment
Customize the definition of EVA
Identify EVA centers
Analyze the drivers of EVA
Tailor an Incentives compensation system
Train all the employees
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