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EVA (Economic Value Added)- economic profit - is one of the most important indicators in assessing the company's production efficiency. 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 exact result in company valuation. 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.

R.A. Andrutsky Chief economist for business planning of NII TK LLP, Master of Economics
Journal "Accounting and Finance", No. 7 for 2008

Balance (‘000 cu)

Assets		Liability and capital
Current assets		Short-term liabilities
Cash and cash equivalents		Short-term financial liabilities
Short-term receivables		Short-term accounts payable
		Other current liabilities
Other current assets		long term duties
Long-term assets	2 833 000	Long-term financial liabilities
Long-term accounts receivable		Capital	1 723 000
Fixed assets		Issued capital
Intangible assets
Other long-term assets		Retained income (uncovered loss)
Balance	3 198 000	Balance	3 198 000

Profit and loss statement (‘000 cu)

Sales income
Cost of sales, incl.
Operating expenses
Depreciation
Administrative expenses
Marketing expenses
Profit from operating activities
Interest expenses
Profit (loss) before tax
CIT expenses, 30%
Total profit (loss) for the period

In the first step, we will determine NOPAT using data from the Income Statement. Then, in subsequent calculations, we use the balance information. In the second step we calculate ACE. To do this, the company's interest liabilities are added to the capital. Next, WACC is determined taking into account the tax shield on debt capital. And in the fourth step we calculate EVA.

1. NOPAT = 535,000 − 123,000 = 412,000 USD

2. ACE = 1,723,000 + 850,000 + 275,000 = 2,848,000 USD

3. WACC = 0.37 × 12% + 0.63 × 14.7% × (1 − 0.3) = 11%

4. EVA = 412,000 − 11% × 2,848,000 = $100,903

The resulting EVA indicator > 0, that is, the company creates added economic value to shareholders.

Conclusions.

EVA strategy is one of the most popular initiatives in the field of value-based management, which allows you to radically reconsider the company's goals and values. The company must be fairly assessed by both potential investors, clients, partners, and owners, so EVA retains its place in the system of key indicators and, in addition to other functions discussed in this article, constantly reminds of the role of the company's owners. EVA in the management system allows for strategic and operational planning, measure and monitor results. I think that for a company aimed at creating value for shareholders, the relevant question will not be “to use or not to use EVA in management?”, but the question “how and to what extent to use EVA?”

1 The data is fictitious.

2 The example shows a simplified version of the definition of ACE; in practice, it is recommended to take the average values of the elements of this indicator at the beginning and end of the reporting period.

Topic No. 3 Business valuation methods used both to assess the value of companies and to manage their value

Economic Value Added (EVA) model. Its modifications to assess the value of the company in an “as is” standard and taking into account planned investments in the company’s fixed and working capital. Factors for managing company value (Value Drivers) in the EVA model.

Economic value added is an indicator of the company’s economic, rather than accounting, profit after paying all taxes and reduced by the amount of the fee for all capital invested in the enterprise.

There are two main schemes for calculating EVA :

1) EVA = NOPAT – WACC × CE

2) EVA = (ROIC – WACC) × CE

NOPAT – net operating profits adjusted taxes;

WACC – weighted average cost of capital;

ROIC – return on invested capital;

CE – invested capital.

According to the EVA concept:

the value of the capital invested in the company is estimated

the assessment breaks down into an assessment of the market value of assets and the current value of the “economic profits” expected from them

“economic profit” - net operating income (NOPLAT) minus the cost of paying for the cost of capital used (CapitalCharge)

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. The market value of the organization is equal to the book value of net assets. In this case, the owner's market gain from investing in this organization is zero, so he wins equally by continuing operations in this organization or investing in bank deposits.

2) EVA > 0 means an increase in the market value of the organization over the book value of net assets, which encourages owners to further invest funds in the organization.

3) EVA< 0 ведет к уменьшению рыночной стоимости организации. В этом случае собственники теряют вложенный в организацию капитал за счет потери альтернативной доходности.

main idea and the economic meaning of the EVA indicator 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 on the invested capital.

Calculation algorithm indicator of economic added value: from net operating profit (NOPAT) the fee for the use of equity and borrowed capital is subtracted, the remaining amount is the created value, which is measured by EVA.

To calculate economic added value(EVA) the accounting indicator "Net profit" must be adjusted by the amount of so-called equity equivalents and adjustments to accounting indicators in terms of their market valuation:

EVA = NOPAT - Capital = NOPAT - WACC * CE, (9.8)

where NOPAT (Net Operationg Profit After Tax) is the net profit received after paying income tax and minus the amount of interest paid for the use of borrowed capital, that is, it is the net profit according to the financial statements (according to the Profit and Loss Statement), taking into account necessary adjustments;

Capital (Cost Of Capital) - the cost of capital of the organization;

WACC (Weight Average Cost Of Capital) - weighted average cost of capital (measured in relative terms - in %), this is the cost of total capital (equity and debt).

CE (Capital Employed) - invested capital, which is capital determined taking into account the cost of resources not included in the balance sheet, is calculated by adjusting financial reporting data by the amount of “owners' capital equivalents”.

WACC is an indicator that characterizes the cost of capital in the same way that the bank interest rate characterizes the cost of borrowing a loan. The difference between the WACC and the bank rate is that this indicator does not imply a straight-line payment, but instead requires that the investor's total present income be the same as what a straight-line interest payment at a rate equal to the WACC would provide.

Cost of capital invested (CE) is calculated according to the formula:

CE = TA – NP, (9.9)

where TA (Total Assets) - total assets (balance sheet);

NP (Non Percent Liabilities) - interest-free current liabilities (on the balance sheet), that is, accounts payable to suppliers, the budget, advances received, other accounts payable.

The weighted average cost of capital (WACC) is determined as follows:

WACC = Ks * Ws + Kd * Wd * (1 - T), (9.10)

where Ks is the cost of equity capital (%);

Ws - share of equity capital (in%) (balance sheet);

Kd - cost of borrowed capital (%);

Wd - share of borrowed capital (in%) (balance sheet);

T - income tax rate (in %).

Cost of equity and (Ks) can be calculated using the formula:

Ks = R + b * (Rm - R) + x + y + f, (9.11)

where R is the risk-free rate of return (for example, the rate on deposits of Russian banks of the highest reliability category), %;

Rm - average return on shares on the stock market, %;

b - beta coefficient, which measures the level of risks and makes appropriate adjustments and adjustments;

x - premium for risks associated with insufficient solvency, %;

y is the premium for the risks of a closed company associated with the unavailability of information about the financial condition and management decisions, %;

f - country risk premium, %.

First modification of the model involves calculating the cost “as is”, that is, without additional investments. This assumes that the business will continue its normal business activities with its existing assets.

K*=∑Act + PV (EVA), (1)

EVA = NOPLAT - ∑Act*WACCact (2)

PV (EVA) = EVA ,(3)

K* - market value of the enterprise (the property complex of the company or the entire capital invested in it);

∑Act - the total market value of the assets available at the enterprise;

PV (EVA) – current value of expected economic profits;

NOPLAT – net operating income minus tax burden

WACCact – actual weighted average cost of capital at the time of valuation;

WACC* - long-term weighted average cost of capital, based on its optimal structure (20% borrowed capital, 80% equity), as well as on the assumption that the cost of borrowed funds will reach the forecast value, based on the expected inflation rate and the average margin of banks .

Second modification of the modelEVA allows you to see the change in the market value of the enterprise in the influence of the project for the commercialization of RIA, but it does not require stopping the enterprise to modernize production assets for new project. IN in this case the model takes into account significant investments, which modify the formula for the expected average annual economic profit.

EVA = Ipl* (ROIC - WACCpl), where (4)

Ipl – planned investments in a project for the commercialization of RIA, which does not require stopping production;

ROIC – average annual planned return on invested capital;

WACCpl. – the weighted average planned cost of capital attracted to the project for the commercialization of intellectual property.

The return on invested capital indicator can be found using the formula:

From this formula it is clear that the more valuable the RIA, the less new investments will be required in it and the more effective the additional investments will be, which will increase the ROIC and the expected average annual economic profit.

When identifying key cost factors the company must be guided by the strategy and phase of the company's life cycle, the presence of potential for improving performance indicators.

As part of company value management, the main factors involved in formula calculation, can be detailed based on smaller components:

The main factors shaping EVA:

By increasing the value of EVA by influencing the factors involved in the model, the manager increases the value of the company.

EVA can be increased as follows:

Increasing business profitability by increasing sales income and reducing costs (saving and optimizing current costs (reducing unprofitable production, etc.)).

Optimization of capital costs.

Information sources:

to calculate the actual values of indicators - consolidated financial statements;

to calculate forecast values of indicators

EVA - forecast financial statements, business plan,

financial and economic model and more.

Minimizing the weighted average cost of total capital.

To improve the efficiency of capital use (optimize the relationship between financial stability, price and return on capital), an analysis of the capital structure is carried out.

Let's consider the process of optimizing the capital structure using the method described by I.A. In blank.

In accordance with this methodology, attracting additional capital, both from the enterprise’s own sources and from borrowed funds, has its limits and is usually associated with an increase in its weighted average cost. To attract investors, it is necessary to pay more income on shares or bonds when placing an additional issue.

When receiving additional loans, the value of the autonomy coefficient decreases and, as a consequence, solvency, which means an increase in the interest rate for the loan due to an increase in the level of bankruptcy risk. Similarly, when additional loans are invested in capital goods, inventories and other low-liquid assets, the liquidity ratio decreases, which also leads to an increase in the interest rate for the loan.

Attracting additional loans when high level financial leverage, and therefore financial risk, is possible only on the terms of an increased interest rate for the loan, taking into account the risk premium for the bank.

SrStSovCap = DolActCap*DivVyp + DolLoanCap*(StavCredit*(1 - CashPrib)), where

SrStSovCap - weighted average cost of total capital, %;

DolActCap - share of share capital;

DivVyp - level of dividend payments, %;

DolZaemCap - share of borrowed capital;

StavKred - level of interest rate for a loan, %;

NalPrib - income tax rate.

In contrast to the criterion of added economic value, indicator and model of monetary value added CVA( Cash value Added), which is practically never used in practice. are based on cash flow assessments. This model was developed by the Boston Consulting Group (BCG) as an alternative to the EVA approach.

The CVA indicator represents the difference between the cash flow from the operating activities of a project or business and the capital invested in it. In turn, the invested capital in monetary terms for each period is determined as the product of its average WACC value and the gross volume of investments.

For the purposes of investment analysis, the CVA value for a specific period t can be determined by the formula: CVA(t) = NOPAT(t) + DA(t) - RDFA(t) – IC(0) * WACC

Where RDFA(t) is the reimbursement of the depreciation fund (economic depreciation of assets). RDFA(t) is defined as a constant payment that should be made periodically at the average cost of capital rate in order to accumulate an amount equal to the gross investment in fixed assets of the FA project. Since the values of RDFA(t) are the same for any period of the project's life cycle, the stream of such payments represents an annuity, the future value of which, when compounded at the WACC rate, must be equal to the initial investment in the depreciable assets FA. Then its value can be determined from the following relationship:

where FA is the initial gross investment in the fixed (depreciable) assets of the project. As in the EVA model, the correct use of monetary added value when evaluating investment projects leads to an exact match with the integral result obtained using the classical NPV method:

Market value added (MVA) is a measure that measures the amount by which a company's market capitalization (that is, the market price of its shares multiplied by the number of shares outstanding) exceeds the value of its net assets as shown on the balance sheet. This indicator is calculated using the following formula:

MVA=Market Value of Capital - Invested Capital

The MVA indicator has some disadvantages. First, it does not provide any insight into when the value was created (it could have happened this year or many years ago). Therefore, it would be more correct to focus on the annual change in the MVA indicator. In addition, since the amount of capital employed is taken from the balance sheet, the existing limitations of the methods accounting are also reflected in this indicator.

SVA(Shareholders Value Added) model was the forerunner of the EVA model. It also sees the value of an enterprise as the value of its property (in the event of its sale) plus the current equivalent of net income from the commercial use of this property (in the event that the enterprise continues to function as an operating one). Thus, the model focuses on directly measuring the change in the value of a business to shareholders (equity value), or shareholder value.

SVA calculation is based on determining the following parameters: pure cash flow and residual value of the business.

SVA = estimated equity value – book value of equity

The main disadvantage of this model is the complexity of calculations and the difficulties associated with forecasting cash flows.

The procedure for calculating the shareholder value added (SVA) indicator

Let the following data on the company be available:

net operating profit (EBI) for the last reporting year - 20,000 units;

duration of the forecast period - 5 years;

growth rate of net operating profit - 15%;

the rate of incremental investment in non-current assets and working capital is 50% of the increase in net operating profit;

weighted average cost of capital (WACC) - 12%.

In English-language economic and business literature the concept is widely used value driver , which is translated into Russian, either as a factor or as a mechanism. Driver means drive, driving mechanism. Therefore, this concept is broader than the traditional concept of factor. The first includes not only power, but also the way it is included in the process and the direction of action. It is characteristic that a driver is a more specific concept than a factor and is less generalizable.

The whole variety of factors influencing the formation of the value of an enterprise can be divided into three levels:

macro-level factors covering political, economic, legal, infrastructural, social, environmental features countries;

meso-level factors covering the state of the industry in which the company operates;

micro-level factors covering the financial and economic state of the business, production potential, the marketing environment in which it operates, its corporate and organizational management structure.

Russian intersectoral modelRIM - the calculation is carried out “from final demand”: incomes together with prices form the value of real final demand, which ultimately determines the scale of production. The model implements the idea of market equilibrium - the idea of mutual influence of production, prices and income.

RIM- a macroeconomic intersectoral model of market equilibrium in the Russian economy, combining a traditional intersectoral approach and an econometric description of the behavior of the main market actors. The information base of the RIM model includes input-output tables in constant and current prices for 1980-2002, the general government budget, the balance of income and expenditure of the population, the labor balance, the capital balance, statistics of money circulation and financial markets.

In this intersectoral model, all elements of final demand are presented in an industry context. Thus, within the framework of this model, the problem of not only general, but also intersectoral equilibrium is realized.

In accordance with the structure of the developed inter-industry balances, the economy in the model RIM is represented by the following twenty-five industries:

1.Electric power industry

2. Oil production

3.Oil refining

4.Gas industry

5. Coal industry

6.Other fuel industry

7. Ferrous metallurgy

8. Non-ferrous metallurgy

9.Chemical and petrochemical industry

10.Mechanical engineering and metalworking

11.Forestry, woodworking and pulp and paper industries

12. Construction materials industry

13. Light industry

14.Food industry

15.Other industries

16.Construction

17.Agriculture and forestry

18. Freight transport and industrial communications

19. Passenger transport and non-production communications

20.Sphere of circulation, including commercial activities

21. Other activities in the sphere of material production

22. Education, healthcare, culture and art

23. Housing and communal services and consumer services.

24. Management, finance, credit, insurance

25.Science and scientific service

As part of interindustry calculations using the model indicators are also used average annual number of employees and average annual value of fixed assets.

Central part of the modelare determination of gross outputs and industry prices using a static model of the input balance (in matrix form: x = (E - A)-1*y) and its modification - the interindustry price equation (in matrix form: p*(A * X) + va = p*X)8.

Edwards-Bell-Olson (EBO) model

The EBO model allows express the value of share capital through financial statements, taking into account adjustments made to them related to inadequate reflection of the value of the enterprise’s property. According to this model, the value of a company is expressed through the current value of its net assets and the discounted flow of “excess income” - deviations of profit from “normal”, i.e. industry average.

Difference between EVA and EBO- is that EVA covers all capital invested in the company (equity and debt), and EBO covers only equity (equity).

The EBO model is based on three main assumptions:

1. The price of the company is equal to the current value of expected dividends:

where is the value of the company;

Dividend flow at a point in time;

Cost of servicing the company's equity capital, discount rate;

The mathematical expectation of a variable, i.e. its most probable value.

2. Clean surplus relation (CSR):

where is the value of net assets at a point in time;

Net asset value at a point in time;

Net profit for the period from to;

Dividends at a point in time.

3. The model of linear information dynamics is represented by a system of autoregressive equations:

where - information about future<сверхдоходах>;

Economic sense this model is the following. The equations reflect the fact that in a free market<сверхприбыли>, generated by the company, cannot remain indefinitely. Over time, excess profits should decrease, and the company's level of profitability will be equal to other companies in its class. The dynamics of equalization remain the same for many different companies, which makes it possible to determine the coefficients of the system in question based on statistical data.

Model of the influence of capital structure on firm price under the assumptionabsence Modigliani-Miller taxes.

The model assumes :

absence of taxes on the company's profits and income taxation of owners of shares and bonds;

stable development and no profit growth. Sales revenue minus fixed and variable costs, including depreciation, selling, administrative and general expenses is equal to operating profit EBIT, EBIT - const;

the price of a company (as the price of any asset) over an infinite time period is determined by the capitalization of operating profit - V = EBIT / k, where k is the cost of capital of the company. For simplicity, it is assumed that profit is constant over the years (profit growth rate g = 0). Indeed, with zero taxes, EBIT (= Disbursements to owners of equity and debt - Taxes) reflects all receipts to owners of capital;

perfection of the capital market, which is expressed in the absence of costs when buying and selling securities and differences in interest rates (for all investors there are uniform loan and investment conditions);

debt capital is less risky (in terms of market systematic risk) than equity capital, and kd< ks ;

Own capital (S) is equal to share capital, i.e. all net profit is distributed as dividends, and replacement of worn-out equipment is carried out through depreciation charges.

Statement 1. The value of any firm is determined by capitalizing its net operating income ( EBIT, at T= 0, where T– tax rate) with a constant rate corresponding to the risk class of the company:

where is the value of a financially dependent company, i.e. using borrowed capital;

The cost of a financially independent company;

Required return for a non-leveraged firm;

Weighted average cost of capital.

It is assumed that both firms are in the same risk class.

Since , as defined by the formula, is a constant, then according to the Modigliani-Miller model, in the absence of taxes, the value of a firm does not depend on the method of its financing.

Statement 2. The price of equity capital of a financially dependent company, , is equal to the sum of the price of equity capital of a financially independent company of the same risk group and the risk premium, the value of which depends both on the difference between the prices of equity and debt capital for a financially independent company, and on the level of financial leverage, t .e. on the ratio of debt and equity capital:

Where D– market valuation of the company’s borrowed capital;

S– market valuation of the company’s share capital;

Constant price of borrowed capital.

Statement 2 states that as a firm's share of debt capital increases, the price of its equity capital also increases, and in a mathematically precise manner.

Thus, the Modigliani-Miller theory states that in the absence of taxes, both the value of a firm and the total price of its capital do not depend on the structure of sources.

Popularly explaining the result obtained using the model, Miller gave an example of dividing a pie, the size of which cannot be changed by using different methods of cutting it.

Modigliani–Miller modeltaking into account corporate taxes

Taking into account corporate income taxes, Modigliani and Miller made the conclusion is that debt financing increases the value of a firm because interest on loans is deductible from taxable income and therefore investors will receive a larger share of the firm's operating profits.

Statement 1. The value of a financially dependent firm is equal to the sum of the value of a financially independent firm from the same risk group and the effect of financial leverage, which is the tax savings equal to the corporate tax rate multiplied by the amount of borrowed capital :

It is important that when corporation taxes are introduced, the value of a financially dependent firm exceeds the value of a financially independent firm by an amount TD. This difference increases with increasing leverage, so The value of the firm is maximized with 100% debt financing.

In the absence of borrowed capital, D = 0 dollars, the value of the firm is equal to the market valuation of its share capital ( S):

where is the price of equity capital of a financially independent firm.

Statement 2. The price of equity capital of a financially dependent firm is equal to the sum of the price of equity capital of a financially independent firm from the same risk group and the risk premium, the amount of which depends on the difference between the price of equity and debt capital of a financially independent firm, the debt-to-equity ratio and the corporate tax rate.

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 in to a greater extent than is acceptable for 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 existed around EVA in last decade. EVA was positioned as The best way uniting 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 specialist in the field social sciences knows that “bonuses” are just one of the small parts of the system effective management behavior.

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

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

EVA can be used to evaluate the performance of a company as a whole, as well as its individual projects or business units, and is therefore often compared to net present value (NPV). 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 on the basis of 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 accepting 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 that 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 next view 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 capital for each type of business. 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 share capital must be allocated to a given direction in order to generate annual turnover 500 thousand US dollars with a non-negative EVA value (that is, the profitability should 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 complete information for calculating 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're talking about about the activities of a business unit or about 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 for its production, that is, the costs of the entire company to maintain the activities of this division, for example, rent of an office building, administrative resource, etc. Such costs 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, etc. However, if the share of indirect costs is large, then the proportional distribution of indirect costs will lead to to an incorrect cost value. You can solve this problem by using operating method costing 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)

Cost of capital for a company in general case equal to the cost of capital for shareholders, that is, the rate of return that they expect to receive on their invested money. 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

An alternative way to calculate the discount rate is the 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 investment risk in the stock market, industry risk and small capitalization of the company are calculated by 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 cost of capital of a company based on expert assessments, that is, assessments of top managers, investment analysts, etc. At the same time, this method of assessing the cost of capital is also the most unreliable, therefore, 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 the calculated EVA value.

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 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 a high EVA value 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 are always determined at this stage its development. 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 within certain period may be negative, but the loss of business stability should not be allowed. 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

To effectively 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 costs of calculating the degree of their influence on general indicator added value will be higher than the premium 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 a general meeting of business leaders. 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 data last year 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 did a lot of work to describe business processes, implement 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 the efficient use of capital. At ROSNO, managers concentrated on executing planned indicators in terms of 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 Each business unit is necessarily allocated a certain amount of money - 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 similar 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 branches and can conduct comparative analysis demand for products, which with a high degree of probability allows us 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 highlights the most priority areas 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. The size of bonuses for lower-level employees may vary depending on the state of affairs in the department.

The entire bonus fund is divided into two parts. Less than half total amount Bonuses are 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. At the same time, the monthly bonus, like the annual one, reduces the size of the division’s capital, since it is paid from its profits, but it cannot be refused. 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.

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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 on 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 a positive EVA value in the current period can be achieved by reducing costs, for example, working capital, wages, and the 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.