EVA Statements to Improve Financial Statement Reporting and Results
In order to gauge financial growth and development of a firm, an entity or portfolio, Economic Value Added (EVA) may be used. In this particular measurement, it is presumed that the element of cost is attached to all forms of capital. In addition, shareholders gain value when the cost of capital is lower than the amount being earned.
The actual value of EVA is computed by subtracting a capital charge from after-tax net operating profit (NOPAT). The cost of capital and economic profit are put into consideration when assessing EVA. A true value is generated for shareholders when the cost of capital is exceeded by a firm’s return on investment (Salehi, Enayati & Javadi, 2014).
It is indeed true that the organizations can benefit from the Economic Value Added (EVA) system.
To begin with, managers in companies desire to obtain and invest capital with impressive returns at the end of a given trading period. In this regard, EVA can be used by both workers and managers to evaluate and monitor the performance of invested capital funds.
In other words, it provides a robust financial management system for any capital injected in a pool of investment (Nicoleta & Munteanu, 2014). When EVA is used to focus on the aspect of growth in capital, two major benefits can be realized.
First, it is possible to boost the wealth of investors because fund managers have adequate time and an effective tool to perform the task. Second, managers have an ample opportunity to seek alternative ways of improving EVA due to minimal disruptions occasioned by systematic cost accounting data.
Hence, the practice of using EVA enhances awareness among stakeholders, especially with respect to efficient utilization of available capital funds. Eventually, shrewd application of EVA produces surplus value to shareholders.
Managers can be held accountable when EVA is employed as a financial reporting tool (Samuelson & Marks, 2012). Myriads of economic activities carried out by managers can be appraised using EVA. Examples include financial outlays that appear as footnotes in balance sheets and income statements.
The latter is attainable bearing in mind that a single financial statement is created by EVA. Therefore, cross-reference of any financial data can be done promptly. All the related costs incurred in the course of investing the available capital fund may be readily accessed. Hence, every dollar spent by managers can be pointed out.
A common decision-making approach is also facilitated by EVA. The latter is particularly crucial when making long-term decisions in organizations. Some of the decision-making platforms where EVA can be instrumental include performance evaluation and resolving budgetary issues (Salehi, Enayati & Javadi, 2014).
This measurement can also quantify results using financial terminologies. In addition, continuous financial improvement, quick response to demands from customers and enhancement of operations of a program like Total Quality Management (TQM) are some of the additional benefits of EVA.
Problems Found with EVA
On the other hand, EVA presents a number of problems when used within an organizational setup. For example, it does not put into consideration the actual alternatives or growth opportunities that prevail when making investment decisions.
Worse still, the value of growth opportunities that practically take place in the market can hardly be reflected by EVA. Firms with significant assets are the only ones that can be best evaluated using EVA (Nicoleta & Munteanu, 2014).
In recap, EVA is a vital financial reporting tool that managers in organizations can use to improve their performance and accountability. The value of shareholders is increased if there is an impressive return on investment. However, EVA may not deliver the anticipated results if applied in organizations that lack substantial assets.
References
Nicoleta, G. C., & Munteanu, V. (2014). The Added Economic Value – an Instrument for the Performance Measurement. Economics, Management & Financial Markets, 9(4), 167-174.
Salehi, M., Enayati, G., & Javadi, P. (2014). The Relationship between Intellectual Capital with Economic Value Added and Financial Performance. Iranian Journal of Management Studies, 7(2), 259-283.
Samuelson, W., & Marks, S. (2012). Managerial economics. New Jersey, USA: John Wiley & Sons, Inc.