The traditional basic financial statements are balance sheet and Profit & Loss account. These statements generate and provide data related to financial performance only. They do not provide any information which shows the extent of the value or the wealth created by the company for a particular period. Hence, there arose a need to modify the existing accounting and financial reporting system so that the business unit is able to give importance to judge its performance by indicating the value or wealth created by it. To this direction inclusion of Value Added statement in financial reporting system is useful.… Read the rest
Business Finance Terms
Cash Conversion Cycle (CCC)
Cash Conversion Cycle (CCC) measures ongoing liquidity from the firm’s operation is defined as a more comprehensive measure of working capital and as a supplement to current ratio and quick ratio. CCC shows the time lag between expenditure for the purchases of raw materials and the collection of sales of finished goods. CCC is a measure of the efficiency of Working Capital Management as it indicates how quickly the current assets are converting into cash. CCC comprises three components of days inventory outstanding (DIO), days sales outstanding (DSO), and days payables outstanding (DPO);
Cash Conversion Cycle (CCC) = Days Inventory Outstanding (DIO) + [Days Sales Outstanding (DSO) -Days Payables Outstanding (DPO)]
- Days Inventory Outstanding (DIO) is a key figure that measures the average amount of time that a firm holds its inventory.
Market Value Added (MVA)
Economic Value Added (EVA) is aimed to be a measure of the wealth of shareholders. According to this theory, earning a return greater than the cost of capital increase value of company while earning less than the cost of capital decreases the value. For listed companies, Stewart defined another measure that assesses if the company has created shareholder value or not. If the total market value of a company is more than the amount of capital invested in it, the company has managed to create shareholder value. However, if market value is less than capital invested, the company has destroyed shareholder value.… Read the rest
Economic Value Added (EVA) and Shareholders Value Maximization
Almost in all books on financial management, the very first chapter introduces the fact that the goal of financial decisions is to maximize shareholder’s value. But why only shareholder’s value and what about others stakeholders like employees, customers, creditors? If one focuses on the shareholder value creation other stakeholder’s interests will automatically become the sub-goals and achieving these sub goals becomes crucial to the achievement of the overall goal i.e. shareholder value maximization. For example, the firm’s profit depends a lot on how the employees perform and to motivate them the firm needs to satisfy their needs and constantly upgrade their knowledge and skills by proper training.… Read the rest
Economic Value Added (EVA) – Definition, Calculation and Implementation
Economic Value Added (EVA) is a value based financial performance measure, an investment decision tool and it is also a performance measure reflecting the absolute amount of shareholder value created. It is computed as the product of the “excess return” made on an investment or investments and the capital invested in that investment or investments.
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“Economic Value Added (EVA) is the net operating profit minus an appropriate charge for the opportunity cost of all capital invested in an enterprise or project. It is an estimate of true economic profit, or amount by which earnings exceed or fall short of the required minimum rate of return investors could get by investing in other securities of comparable risk.”
Concept of Economic Value Added (EVA)
The onset of liberalization and globalization of the Indian economy over the ten years has resulted in shift of the corporate goals from socio-economic focus to an increasing shareholders value. Therefore, the present day need is to choose the right metrics that would help to measure organizational progress in meeting the above mentioned strategic goal. Although there are few traditional performance metrics like balance sheet measures (namely, rate of return, shareholders’ profit, earning per share) and market driven measures (namely, market capitalization, price earning ratio), these are subject to certain deficiencies. Balance Sheet based measures are veiled in accounting anomalies that generally measure notional profit, not real ones and market driven measures are prone to volatility of the bourses.… Read the rest