Measuring & Controlling Assets Employed
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Paramjit SharmaMeasuring & Controlling Assets Employed
Uploaded by
Paramjit SharmaMeasuring & Controlling
Assets Employed
Measuring & Controlling
Assets Employed
2 methods
ROI EVA
Purpose of the Analysis
1 To Provide information for sound financial decisions
2 To measure performance of the business
The Lesson
Focusing on Profit without considering the Assets
Employed is an inadequate basis for Control
BU Manager’s Performance Objectives
1 Generate Adequate profit on resources
2 Invest in additional resources when they
Provide adequate return
Business Unit Financial Statements
Assets (Rs in 000)
Liabilities Balance Sheet
Current Liabilities Current Assets
Accounts Payable 90 Cash 50
Receivables 150
Other Current 110 Inventory 200
Total Current Liabilities 200 Total Current Assets 400
Fixed Assets
Corporate Equity 500 Cost 600
Depreciation 300
Book Value 300
Total Equity 700 Total Assets 700
Income Statement
Sales 1000
Expenses 850
Depreciation 50 900
Income Before Taxes 100
Capital Charge 500x 10% 50
Economic Value Added 50
ROI= 100/500=20%
Return on Investments
ROI is a ratio where the numerator is income
and the denominator is assets employed
ROI= Profit/Sales x Sales/Capital Employed
Economic Value Added
EVA is an amount rather than ratio. It is derived by
Subtracting a capital charge from net operating profit
EVA= Net Profit- Capital Charge
Capital Charge= Cost of Capital x Capital Employed
EVA= Capital Employed (ROI-Cost of Capital
Measuring Assets Employed
Measuring Assets Employed—2 0bjectives
What Practices induce BU Managers to use their
Assets more efficiently and acquire new Assets?
What Practices best measure the Performance
as an Economic Entity ?
Business Unit Financial Statements
Assets (Rs in 000)
Liabilities Balance Sheet
Current Liabilities Current Assets
Accounts Payable 90 Cash 50
Receivables 150
Other Current 110 Inventory 200
Total Current Liabilities 200 Total Current Assets 400
Fixed Assets
Corporate Equity 500 Cost 600
Depreciation 300
Book Value 300
Total Equity 700 Total Assets 700
Assets Employed
Receivable Investments
Cash
Property,
Working Plant &
Capital Equipments
Assets Employed
Cash
•Better to have Central Control
•Can be % of Sales
•Can be equivalent to monthly sales
•Few companies omit cash from
investments
Assets Employed
Receivable
•What is the credit limit ?
•Whether CP or Sp?
Assets Employed
Inventories
•What rate, Cost or SP ?
•LIFO/FIFO or Standard Price
•WIP-advance payments
•Inventory-a/c payables
Assets Employed
Working
Capital
•Whether to include CA in Investments?
•Whether to include WC in investments ?
Assets Employed
Property,
Plant &
•Acquisition of New Equipments Equipments
•Gross Book Value
•Annuity Depreciation
•Other Valuation Methods
•Leased Assets
•Idle Assets
•Intangible Assets
•Non-Current Liabilities
•Capital Charge
•Survey of Practices
ROI & EVA
Benefits of ROI
•Comprehensive Ratio
•Simple to Calculate
•Common denominator
Benefits of EVA
•Profit as objective
•Strong correlation with market Value
Increasing EVA
Divesting Assets where ROI is less than COC
Increasing ROI through BPR
Aggressive new investment in Assets where ROI
is more than COC
Increase Sales, Profit Margin or Capital efficiency
Ratio
Difference Between ROI & EVA
ROI
Business Cash Receivable Inventories Fixed Assets Total Investments Budgeted Profit ROI
Unit
A 10 20 30 60 120 24 20%
B 20 20 30 50 120 14.4 12
C 15 40 40 10 105 10.5 10
D 5 10 20 40 75 3.8 5
E 10 5 10 10 35 ( 1.8) (5)
EVA
1 2 3 4 5 6 7
Business profit Amount Rate Req.Earnings Amount Rate Req Earnings Budgeted EVA
Unit Potential (1)-{ (4)+( 7 )
A 24.0 60 4% 2.4 60 10% 6.0 15.6
B 14.4 70 4 2.8 50 10% 5.0 6.6
C 10.5 95 4 3.8 10 10 1.0 5.7
D 3.8 35 4 1.4 40 10 4.0 (1.6)
E 1.8 25 4 1.4 10 10 1.0 (3.8)
Use of EVA in Planning and Control
Strategic Direction
Acquisition
Operational Improvement
Product Line Discontinuation
Working Capital Focus
Cost of Capital Focus
Incentive Compensation
Evaluating EC Performance of the Equity
Diagnostic instruments
Basis for value of company as a whole
Focus on future Profitability
Case
Discussion
Dell Marden
Computers Company
