Srusti Management Review (Jun 2016)
Financial Evaluation of Firms Using Economic Value Added as a Performance Measure – A Comparative Study
Abstract
If business firms have to be viewed as economic entities, then their returns too must be measured in economic terms. Traditional financial statements and performance measures do not represent the proper value created by a firm. Economic Value Added (EVA) is a measure that represents the true value added by a firm by taking into account the impact of cost of capital on earnings. Even though EVA is a powerful measure, there are no studies to understand whether firms which have adopted EVA perform better than similar firmss which have not adopted EVA in the Indian context. Using 10 years financial data of a sample of 42 firms (21 EVA and non-EVA firms each), the current study is a comparative analysis of the financial performance of EVA and non-EVA firms. The results of the study show that EVA firms perform significantly better than non-EVA firms on certain financial parameters on a case by case basis. However, on a consolidated basis, EVA firms do not perform significantly better than non-EVA firms especially in terms of profitability. The paper thus concludes that EVA is not seen as a serious driver of profitability in the Indian context
