EVALUATION OF ECONOMIC VALUE ADDED AS A PERFORMANCE MEASUREMENT TOOL-A STUDY
International Journal of Marketing & Financial Management
In traditional method of computing the final results, compensation to labour and management is charged to profit and loss account. Cost of debt is also charged to the profit and loss account. Only the cost of equity capital is ignored. But in reality equity capital is scarce and has an opportunity cost, just as any factor of production. Yet traditional measures like ROI i.e. Return on investment, EPS i.e. Earning per share and Net Income does not account for the cost of equity capital. Economic
... y capital. Economic Value Added is computed by taking into account the cost of equity. Economic Value Added is basically the difference between the Net operating profit After Taxes and the cost of funds employed for that economic entity. It is a measure of economic efficiency of a company. Economic Value Added is also an indication of effectiveness in capital allocations. Economic Value Added is aimed to be a measure that tells us what has happened to the wealth of shareholders. It implies earning a return greater than the cost of capital, increases value and earning and earning less than the cost of capital decreases value. But several empirical researches still contradict superiority of Economic value added as a performance measurement tool. In this research I have tried to compare Economic value added to some other traditional performance measures. As the objective of a good management is to increase shareholder's wealth so the performance measure which helps in predicting market value added more accurately would be considered a better performance measure. The significance of relationship of Economic Value Added and other traditional measures with Market value added is analyzed in this research which helps to evaluate effectiveness of the performance measurement tools. In this study I have taken 30 large cap Indian companies as sample and analyzed the relationship of Economic Value Added and other traditional measures with Market value added of those companies.