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Module V

The document discusses key financial performance metrics including Return on Investment (ROI), Economic Value Added (EVA), Market Value Added (MVA), and Shareholder Value Creation. ROI measures profitability by comparing net profit to total assets, while EVA assesses a company's financial performance by deducting the cost of capital from operating profit. MVA indicates the wealth created for investors beyond their initial investment, and Shareholder Value Creation focuses on strategic decisions that enhance shareholder wealth over time.

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Tahseen bhat
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9 views2 pages

Module V

The document discusses key financial performance metrics including Return on Investment (ROI), Economic Value Added (EVA), Market Value Added (MVA), and Shareholder Value Creation. ROI measures profitability by comparing net profit to total assets, while EVA assesses a company's financial performance by deducting the cost of capital from operating profit. MVA indicates the wealth created for investors beyond their initial investment, and Shareholder Value Creation focuses on strategic decisions that enhance shareholder wealth over time.

Uploaded by

Tahseen bhat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Module V

Return on investment, or ROI

It is the most common profitability ratio. There are several ways to determine ROI, but the most
frequently used method is to divide net profit by total assets (Total Investment in the Business)
e.g. if net profit is $100,000 and your total assets are $300,000, your ROI would be .33 or 33
percent.

ROI deals with the money you invest in the company and the return you realize on that money
based on the net profit of the business

Economic Value Added:

Economic value added (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. This measure was devised by Stern Stewart and Co. EVA can also be
referred to as economic profit, and it attempts to capture the true economic profit of a company.
EVA is the incremental difference in the rate of return over a company's cost of capital.
Essentially, it is used to measure the value a company generates from funds invested into it. If a
company's EVA is negative, it means the company is not generating value from the funds
invested into the business. Conversely, a positive EVA shows a company is producing value
from the funds invested in it. The purpose of EVA is to assess company and management
performance. The formula for calculating EVA is:-

Net Operating Profit after Taxes (NOPAT) - Invested Capital * Weighted Average Cost of
Capital (WACC)

Market Value Added

Market value added (MVA) is a calculation that shows the difference between the market
value of a company and the capital contributed by investors, both bondholders and shareholders.
In other words, it is the sum of all capital claims held against the company plus the market value
of debt and equity.

It is calculated as:
Companies with a high MVA are attractive to investors not only because of the greater
likelihood they will produce positive returns but also because it is a good indication they have
strong leadership and sound governance.

MVA can be interpreted as the amount of wealth that management has created for investors over
and above their investment in the company. Companies that are able to sustain or increase MVA
over time typically attract more investment, which continues to enhance MVA. The MVA may
actually understate the performance of a company because it does not account for cash payouts,
such as dividends and stock buybacks, made to shareholders. MVA may not be a reliable
indicator of management performance during strong bull markets when stock prices rise in
general.

Shareholder Value Creation

Shareholder value creation is the process by which the management of a company uses the
equity capital contributed by the shareholders to make and implement strategic and financing
decisions that will increase the wealth of shareholders in excess of what they have contributed.

Shareholder Value Creation is driven by long-term free cash flows to equity holders. Total value
created during a year, comes not only from operations during that year, but also from
expectations formed during that year about future years’ operations

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