Balanced scorecard and EVA
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The organization that you work for has been thinking about implementing one of the items below and they have asked you to prepare a summary of these topics. What can you tell me about these topics.
1. Balanced Scorecard
2. Economic Value Added
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Solution Summary
Economic Value Added is the financial performance measure that comes closer than any other to capturing the true economic profit of an enterprise.
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Economic Value Added:
Economic Value Added is the financial performance measure that comes closer than any other to capturing the true economic profit of an enterprise. EVA also is the performance measure most directly linked to the creation of shareholder wealth over time.
Put most simply, EVA is net operating profit minus an appropriate charge for the opportunity cost of all capital invested in an enterprise. As such, EVA is an estimate of true "economic" profit, or the amount by which earnings exceed or fall short of the required minimum rate of return that shareholders and lenders could get by investing in other securities of comparable risk.
The formula for calculating EVA is as follows:
EVA= Net Operating Profit after Taxes- (Capital*cost of Capital)
In simple words, the opportunity cost of capital is being deducted from the net profit after tax of an enterprise to arrive at the "true" profit of an enterprise. Most of the modern private equity firms and prudent investors and business professionals assess businesses and investment opportunities via this method as it produces a true picture of the attractiveness of the business opportunity.
The capital charge is the most distinctive and important aspect of EVA. Under conventional accounting, most companies appear profitable but many in fact are not. As Peter Drucker put the matter in a Harvard ...
Education
- BCom, SGTB Khalsa College, University of Delhi
- MBA, Rochester Institute of Technology
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