EVA analysis of MNCs

Introduction
Tool

of performance measurement Established by Stern Stewart in 1989 Adam Smith Maximize wealth of owners EVA is True Economic Profit Until a business returns a profit that is greater than its cost of capital, it operates at a loss. -Harvard Business Review

Calculating EVA

Interpreting EVA

A positive EVA means the firm generated a return that exceeds the opportunity cost of capital. The value of the firm should increase

A negative EVA means the firm did not generate sufficient return to cover its cost of capital The value of the firm should decline

Strategies to enhance EVA

Status

Quo with growth

Expand

Overhaul Reduction

in financing cost

Advantages Of EVA
1. 2. 3.

4. 5. 6.

No ceiling on the amount managers can take home as incentive pay Managers think like, act like and are paid like owners. Targets are set over a time horizon that is more than one year - usually three to five years - forcing a longterm view into managerial decision-making Cuts capital cost Inculcates financial discipline among employees Increasing EVA directly benefits the shareholder and has been found to have a positive influence on a companys stock price

Disadvantage
1.

2.
3.

4.

5.

Doesnt Forecasts Of Future Cash Flow Involves lots of complexity. Works better at the individual level than team level, unless goals are appropriately structured. May make companies risk-averse. New investments that look risky or difficult to quantify in terms of expected payback may never be made using EVA. Result Can Be Manipulated

EVA v/s Traditional Performance Measures

Return

on Investment
on Equity per share

Return

Earnings

EVA at MNCs
EVA

of Infosys

http://www.infosys.com/investors/reports-

filings/annualreport/annual/Documents/AR2011/ai_16.html

CONCLUSION
Economic

Value-Added is the surplus generated by an entity after meeting an equitable charge towards providers of capital. is the post-tax return on capital employed (adjusted for the tax shield on debt) less the cost of capital employed. which earn higher returns than cost of capital create value, and companies which earn lower returns than cost of capital are deemed harmful for shareholder value

It

Companies

At Infosys, EVA is used as a tool to calculate the value delivered to customers. Infosys reasons that if it can tell its customers that what it is delivering in terms of value is higher than what the customer pays Infosys for the service, the customer will be less worried about price alone.

 When

EVA improves from year to year, the shareholders as well as the employees would be happy. The value addition is the outcome of improvement over operating efficiency. The following measures are recommended to enhance EVA further: Improve the operating profit by the core business activities. Enhance operating profit without infusing additional capital. Additional investments can be contemplated when there is potential to increase operating profits. Projects that can fetch a return more than cost of capital should be explored. Capital should be withdrawn from projects which give less returns The capital structure should be resigned to bring down the cost of capital.

Thank You
Babita

Burdak Tanu Maglik Pratik Bhansali Sachin Katudia Hardik Patel