Value-Based Controlling & International Accounting of Economic Value Added (EVA) - An Overview

Thomas Hammer and Patrick Siegfried
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Thomas Hammer: International School of Management, Frankfurt am Main, Germany

Oblik i finansi, 2022, issue 2, 43-48

Abstract: This paper will discuss an important target variable in value-based management: the Economic Value Added (or EVA). EVA is a measure of a company's financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis. EVA can also be referred to as economic profit, as it attempts to capture the true economic profit of a company. This measure was devised by management consulting firm Stern Value Management, originally incorporated as Stern Stewart & Co. This research will also discuss adjustments and different types of assumptions that are necessary for the calculation as well as how to use them properly to obtain an interpretable result. Paper will explain the formula and which conversions should be considered. It remains to be noted that the EVA concept only leads to small progress from a scientific point of view, but that the clever marketing by Stern & Stewart has initiated a renaissance of the underlying residual profit concept. The paper provides practitioners and academics with a good overview of the demonstrable added value of EVA controlling and, in contrast, also illustrates the weaknesses of the calculation model or the inaccuracy due to interpretation variables, which overall limit the value of EVA as a management key performance indicator. The research includes comprehensive and substantial discussion in the scientific literature on EVA and its interpretation.

Keywords: Conversions; Cash Value Added; Economic Value Added; Value-Based Management; Controlling (search for similar items in EconPapers)
JEL-codes: G10 G23 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:iaf:journl:y:2022:i:2:p:43-48

DOI: 10.33146/2307-9878-2022-2(96)-43-48

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