1、EVA ManualGeneral ConceptTable of ContentsGeneral ConceptI. Introduction.11. EVA is a management tool that measures true economic profit .12. EVA can be integrated in all key processes.13. Decision-making based on EVA.2II. Decision-making with EVA .3A. How to build up EVA on operating unit level.31.
2、 Overview .32. NOPAT (Net operating profit after tax).33. Invested capital .44. Cost of capital.65. Focus on Delta EVA.7B. How to build up EVA on the Group and SBU level .8C. Use of EVA in the XY management system .91. Management reporting .92. Capital expenditures.103. Portfolio analysis .11Details
3、 of the EVA CalculationIII. Appendix._I. Introduction 1. EVA is a management tool that measures true economic profitAll managers of XY should focus on improving the Groups overall value. With EVA, for the first time, there is a tool that reflects not only the operating performance, but also the expe
4、cted return on the invested capital of XY. The EVA system encourages managers to think and act like owners, treating the companys resources as if they were their own.EVA reflects not only operating profit after taxes, but also takes into account costs for debt and equity capital. Creating shareholde
5、r value may be achieved by improving performance, growth, portfolio management and optimisation of capital structure. EVA provides a tool for all of these aspects.EVA is a management tool. It helps managers to evaluate opportunities, set goals, measure results, and benchmark performance. EVA is also
6、 an accurate basis for value-oriented incentive compensation schemes.2. EVA can be integrated in all key processes Typically, companies use a variety of conflicting measures such as earnings growth, earnings per share, return on equity, market share, gross and net margin, cash flow, NPV and ROIC. Us
7、ing a number of different measures leads to conflicting goals. This is why we will use EVA as a single major performance measure.Goal setingPerfomanceMsutIncetivSysmStraegic &Opin plnigEVAOperatingDcsoCapitl Budgetin& AcqisoThe EVA financial management system supports and motivates value-based decis
8、ion-making for day-to-day operating decisions, budgeting and capital planning and strategic initiatives. By using EVA for all of these processes, as well as for performance measurement and incentives, managers of XY will focus on the goal of creating value._3. Decision-making based on EVA Although t
9、here are countless individual activities people can pursue to create value, ultimately they all fall into one of four categories: EVA can be increased by enhancing operating efficiency (“performance”), investing in value-creating projects (“growth”) or divesting capital from uneconomic assets or act
10、ivities (“asset management”). EVA can also be increased by the financing strategy of minimising the cost of capital by optimising the capital structure. EVA=Net OperatingProfit aftr Txes(NOPA) Investd Capital x Capital StructrePerformanceGrowthAset MangemntWeighted AverageCost of Capitl(WA)- Perform
11、anceImproving operating profits without tying up more capital in the business will directly increase EVA. - GrowthInvestments in new equipment and working capital may be required to increase sales, develop new products, services, markets and customers, all of which results in higher profits. As long
12、 as these investments generate a higher return than the cost of capital, shareholder value will increase. EVA is a perfect indicator of this value creation.- Asset ManagementRationalising, liquidating or curtailing investments in operations may be necessary if a business or asset cannot generate ret
13、urns higher than the cost of capital. Thus, EVA encourages active asset portfolio management. Additionally, working capital management is a means of increasing EVA by optimising inventory levels and managing payables and receivables.- Capital StructureLenders and shareholders expect different rates
14、of return according to the risk they are taking. Improving EVA by optimising the capital structure is an action that can primarily be taken on the Group and SBU level._II. Decision-making with EVA A. How to build up EVA on the operating unit level1. OverviewEVA is a transparent measure that is easy
15、to calculate:EVA= - x WAC EVA= Net Operating Profit After Taxes Capital charges (NOAT)Adjusted operatingincmTaxes InvestdCapital or:2. NOPAT (Net operating profit after tax) a) IntroductionNOPAT is the adjusted operating income after standard taxes.If you want to know how to manage operating perform
16、ance, use NOPAT. It includes standard taxes because they are an important cost factor. Some specific adjustments are incorporated to reflect economic reality better and to motivate correct decision-making.b) CalculationOperating Income+/-EVA adjustents-Standar taxes=Net operating profit after taxes
17、(NOPAT)The following positions will be adjusted: (For a detailed description of the adjustments and the accounts involved, see Appendix):+Godwil amortisation+/-Results fro loans and participations+/-Separtion f inacing results=EVA adjustments on perating income- Goodwill amortisationGoodwill amortis
18、ation of the period is added back to operating income as from an economic point of view the value of the acquisition reflected in goodwill does not diminish, in contrast to standard accounting treatment. _- Results from loans to and shareholdings in non-consolidated and equity companiesAs operating
19、management is responsible for the performance of investments in and loans to non-consolidated companies, the results from these assets are included in the operating performance measure.- Separation of financing resultsTo exclude any financing costs from NOPAT, some financial charges that are include
20、d in operating income (e.g. interest related to pensions, which are part of personnel costs, or interest related to operating leases, which is implicit in the leasing rates) are added back to operating income. Foreign currency results are included in NOPAT (and not in financing costs) as they are re
21、garded as being part of the operating activities. 3. Invested capitala) IntroductionCapital is not free since both lenders and equity investors expect a return on their investments. The concept of EVA is based on a simple rule:A business only creates value if in the long term it earns at least the c
22、ost of the invested capital. Invested capital includes all assets that can be attributed to a business minus provisions and liabilities for which no financing costs are charged (e.g. trade payables). b) Calculation+Tangible and intagible asetsIvestmts d lons+/-Nt working capital-Provisis+/-Adjustmen
23、ts=Investd capitalIn addition to tangible and intangible assets, the following positions are included in invested capital (For a detailed description of the adjustments and the accounts involved, see Appendix):- Investments and loansInvestments in and financial loans to non-consolidated and equity c
24、ompanies (including cash) are part of the invested capital, as operating management is responsible for the performance of these activities.- Net working capitalNet Working Capital consists of inventory and operating receivables less operating liabilities. Efficient management of net working capital
25、reduces invested capital, capital charges and therefore improves EVA.- ProvisionsProvisions are regarded as non-interest bearing and are therefore deducted from invested capital. Provisions for pensions and provisions for deferred taxes are treated differently and will not be deducted from invested
26、capital._- Adjustments- Goodwill amortisationThe full historical goodwill from the time of the acquisition is included in invested capital. Therefore accumulated goodwill amortisation is added back to invested capital.- Rental and leasing contractsThe present value of future rental and operating lea
27、se contracts is included in invested capital in order to reflect the risk associated with future payment obligations.- Off balance sheet obligationsIn order to show the true risk associated with off balance sheet obligations, they are included in invested capital. In effect, the capital charges will
28、 be reduced by a corresponding item in NOPAT in order to derive an adequate risk premium for those items.- Construction in progressAssets under construction are not included in invested capital because they do not earn operating income. As a general rule, the calculation of capital within the XY Gro
29、up will be based upon average capital during the year. As of 2002, this average calculation will be based on the quarterly financial statement._4. Cost of capitalCapital is not free, since lenders and shareholders expect a return on their investment. Lenders require a return on debt in the form of i
30、nterest payment. Shareholders expect a return as well. XY will eventually need new equity from the capital market. Only if shareholders anticipate that XY will be able to meet their expectations will they be willing to invest new capital on favourable terms. This expected return on equity can be mea
31、sured and is part of the cost of capital.In the Weighted Average Cost of Capital (WACC) the cost of debt and the cost of equity are combined, with weights based on the debt/equity ratio.WACC = %debt * Net Cost of Debt + %equity * Cost of EquityUsing this approach country-specific WACCs are calculate
32、d. To illustrate the formula the WACC calculation for one country is shown. The cost of debt is 3,9% after-tax. The shareholders expect a return of 10,5%, a higher figure because the risk is higher than for a debt investment. The debt-to-market value (leverage) ratio is 52%: Cost Weight Weighted Cos
33、tDebt after tax 3,9% 52% 2,0%Equity 10,5% 48% 5,1%Weighted Average Cost of Capital 7,1% (rounded 7%)You can find the specific WACC of different countries on the Intranet under Group functions/Reporting, Controlling, Investor Relations (RCI)/WACC._5. Focus on Delta EVA If you have calculated EVA for
34、your business, you may have found out that it is not comparable to other units. This is due to the fact that invested capital is stated at book value, which often does not reflect fair value. Does that mean that EVA does not work? No. As absolute values are sometimes not comparable, we focus on Delt
35、a EVA, which reflects the change in EVA from one period to another. EVA is a management tool. It can help managers to evaluate opportunities, set goals, measure results, benchmark performance and deliver incentive compensation.Delta EVA is the measure because- management action should always be dire
36、cted towards the future- when evaluating opportunities, an increase of EVA gives the right signal- when setting goals, Delta EVA gives appropriate incentives- when measuring results, Delta EVA shows a comparable figureThe following example compares the reporting of a unit that belongs to the Group f
37、or a long time to the reporting of a recently acquired unit. Both companies have a NOPAT of 120. Due to depreciation, the book value of assets of the company that has been part of the Group for a long time is much lower than the book value of assets of the recently acquired company. Both units inves
38、t in a new project that is equally profitable:Historic part of GroupEVAInvestd capitalNOPATCapital chargeDelta EVAExistingbuies10 1.0 1040 12 12012120-10 -10 -10-402 20 280 2 282 2Recnt AcquisitonNewInvstmnt ExistingbuiesNewInvstmntTotal Total-5013250 -101321.0Because of different levels of invested
39、 capital, the EVA of the existing company is much higher than the EVA of the new company. The example shows that Delta EVA correctly indicates the performance of the units because it reflects the profitability of the new project. _B. How to build up EVA on the Group and SBU levelValue-oriented decis
40、ions are taken on all corporate levels. The EVA definition applied on the respective level reflects managers responsibilities: Group Operating mangemnt rti ivestt decisions Responsibilty for invst apital (incl. gdwil) Investor Relations Capital structre Taxes Mjor investments/acquisitons Gdwil fro t
41、h iit f company A and copany B SBU Operating Units As compared to the EVA definition on the operating unit level, the following items are treated differently on the Group and SBU level: - Taxes- Goodwill from the acquisition of A and B- Currency Translation Adjustment (CTA)For details of the EVA calculation on the group and SBU level, see Appendix B.
