An Analysis of the Discrepancies Between EVA and Net Profit: A Study with Reference to GEM Listed Companies

Xuefeng Tian, Tiantian Zhang and Ann Rensel

The IUP Journal of Accounting Research and Audit Practices, 2014, vol. XIII, issue 2, 20-26

Abstract: The Economic Value-Added (EVA) considers the cost of equity investments and pays more attention to the long-term development of the company through a number of adjustments in net profit. EVA emphasizes the economic benefits, while the net profit emphasizes it in an accounting sense. When the accounting profit shows that the development of the company is sound, a negative value of EVA may also appear. This paper, considering the GEM listed companies as the sample, uses descriptive statistics and sensitivity analysis to find out the causes of discrepancies between EVA and net profit, showing that the cost of equity capital is an important cause. EVA can better reflect a company’s created value, which reminds the managers to pay high attention to enhancing the efficiency of the use of capital in order to increase value creation for shareholders. Based on the findings, the establishment of an EVA management system is recommended to create a corporate culture regarding value creation as the core for achieving rapid and healthy development of the companies listed on GEM.

Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:icf:icfjar:v:13:y:2014:i:2:p:20-26

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