Managerial-finance

EVA Challenge was OK. It is more geared towards senior managers who are thinking about EVA as a model for their companies. In that regard, this books does a fine job.

I was hoping the book would deal with more of the matamatics associated with defining EVA in relation to various projects and business decisions. This book contailed very little information in this regard.

Authors Joel Stern and John Shiely advocate a total revolution in the way companies are valued and measured. They make a convincing case for using EVA ("Economic Value Added") as the primary measure of corporate performance. The authors argue that the SEC's yardstick for corporate reporting, the "Generally Accepted Accounting Procedures" (GAAP), was designed to protect lenders by depicting a company's liquidation value. As such, GAAP provides an overly conservative and only marginally accurate picture of financial health. EVA principles - at least according to the consultants who advise companies on using them - evaluate intangible assets more realistically and correspond more closely to stock market performance. We from getAbstract recommend this book to executives who seek improved corporate financial and market performance, and to investors interested in understanding how value is created and maintained.

One of the most difficult questions to answer is what a company's worth is. Two developments in American Capitalism have contributed to the question's complexity. First, shareholders have divorced themselves from the corporations operation, leaving the task to professional managers.

Second, generally accepted accounting principles do not align expenses with benefits, distorting economic reality. As a result, investors who want to compare the cash they can take out of a company with the cash they have invested are hampered.

The authors argue Economic Value Added (EVA) is a true measure of a company's economic performance, in addition to being a strategy for creating shareholder value. Properly implemented, they state, EVA frees the measurement of corporate performance from the vagaries of accounting principles and gives both shareholders and management a clear picture of the value the company creates.

EVA is the profit that remains after deducting the cost of the capital invested to generate that profit or EVA = Net Operating Profit After-Tax minus capital charge. Effectively implemented, the tool becomes the basis for an incentive plan that rewards managers for actions that increase shareholder returns and vice versa.

John S. Shiely, president of Briggs and Stratton and co-author of the book, notes this strategy provided the foundation of his company's turnaround. In 1989, the world's largest producer of air-cooled engines had an EVA of negative $62 million based on $1.3 billion in sales. By re-organizing and focusing its strategy while developing its EVA program, the company staged a dramatic turnaround. By 1999, it reported a record positive EVA of $50.9 million. Shareholders, who bought $100 worth of stock at the beginning of the program, saw it increase in value to $673 in 1999.

The authors claim EVA is ideal for knowledge-based companies making heavy infrastructure investments today for any anticipated return later. EVA treats cash outlays that represent investments as capital rather than expenses. The capital in these knowledge based industries consists of research, development, marketing, advertising and start-up costs. Accounts view these expenditures as expenses, but it is realistic to capitalize them and amortize them over their useful lives.

In most industries, those advocating change initiatives (usually consultants) only need to run around warning that the sky is falling in order to be heard - and indeed in many industries the sky does look a bit shaky. Apparently, that claxon-sounding process is a bit more complicated in the banking industry, where no one wants to suggest that something might be, um, unsound. Kern and Dombret have adapted the phrase "a less rosy future" to describe their concerns regarding the issues that European retail banks face today. Make no mistake, however, despite their delicate and responsible phrasing, Kern and Dombret see an immediate need for banks to undergo a serious transformation. The traditional market activities of banks - the value chain - must be broken up into more specialized parts, and banks must find a market segment they can serve, and then adapt to serve it. While the topic is a bit specialized, we strongly recommend this book to anyone with an interest in the future of banking.