Economic Value Added – Advantages and Disadvantages

The economic value added is a strict utility, incorporating the traditional definition of capital costs contributed by the shareholders in the income statement. Think of a statement in which shareholders receive “interest” as well as creditors, as if charged for the capital in the business.

The economic value added, can also be seen as a set of administrative tools that take into account the gain that should be in the company to recover its investment.

As expected, the economic value added has some advantages that should be highlighted, among which we mention the fact recognize the importance of using capital (operating assets) and their associated costs for (cost of capital).

Another important advantage presented by the economic value added, is that it shows clearly the relationship between the operating margin and intense use of capital, so that can be used to identify opportunities for improvement and appropriate investment levels to achieve them.

Of course, the model presented by the economic value added are also some disadvantages, such as failure to consider the future prospects of the company, besides requiring a lot of adjustments to financial information company.

Moreover, taking into account the above, the economic value added requires a tradeoff between accuracy and simplicity of calculation, since very complicated adjustments resulted in a lack of credibility in the results.

So Mr. employer, now has many more tools to make the decision on starting the process of calculating the economic value added, taking into account all the advantages but also all the inconveniences that can be generated.

The Practitioner’s Guide to a Measurement and Management Framework: Craig Savarese

The shareholder value creation philosophy is a central element in many companies’ financial management practices. A widely adopted approach to measuring financial performance and managing for value creation is economic profit (economic value added). A deceptively simple concept, companies often are not prepared for the challenges and issues they need to consider when measuring economic profit, nor for how to incorporate it into financial management practices. This book addresses these challenges by: developing a framework for linking economic profit to shareholder value; explaining the issues relevant to developing a company-specific economic profit measure; and demonstrating how to incorporate economic profit into financial management practices. The book is about practical application - designed as a user’s guide - so that you can apply shareholder value principles and understand the implications for your business. It shows how economic profit links to shareholder value, and dispels commonly cited myths about adopting a shareholder value framework to drive a company’s financial management practices. It is aimed at financial managers and accounting professionals, managers, consultants and equity analysts who want to understand the application of shareholder value.

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