¶ … Economic Value Added Statements Improve Financial Reporting
There are many potential advantages of using Economic Value Add analysis to improve financial reporting, results and increase the probability of success for specify investment initiatives and programs. There are also limitations or problems with this technique as well, which are briefly described in this analysis.
Analysis of Earned Value Added (EVA)
In defining EVA, the equation used for calculating it is based on the Return on Assets (ROA) subtracted from the weighted average cost of capital multiple by total capital (Burkette, Hedley, 1997). The equation is often shown as ROA -- Weighted Average Cost of Capital x Total Capital. The benefits of this approach most often cited by companies using it and researchers who study its adoption is the ability to create a single, unified objective measure of corporate performance that cannot be manipulated or inflated easily (Burkette, Hedley, 1997). Second, the EVA measurements in many corporations are used for evaluating different investment alternatives and also prioritizing them for specific investment criterion and objectives (Pajoohi, 2012). Third, EVA is excellent at measuring the opportunity costs of different business investment and operations over time (Colauto, Ulisses, Wagner,...
However, EVA is neither as perfect as claimed by its advocates, nor is it the only performance measure that suggests a path to a superior stock return" (emphasis added) (p. 319). More importantly, though, while the economic value added measurement approach to financial performance may not be without its detractors, the scholarly literature is consistent in emphasizing the need for such initiatives for companies to remain competitive in an increasingly
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