Economic Value Added: A Conceptual Framework

Abstract

The usefulness of traditional accounting measure, such as earnings per share (EPS), return on assets (ROA) and return on equity (ROE), and their effect on shareholder (market) value, has been discussed for some time. Since the 1990s, strong arguments have been raised in favour of economic value added (EVA) as an accounting measure, mainly by the Stern Stewart Consulting Company and Associates (Stewart 1991:215; Stern 1993:36). It can be proven theoretically that EVA is superior to other measure of performa nee (Excluding residual income), on the grounds that it accounts for the full cost of capital, including the cost of equity. EVA is a measure of pure economic profit; in other words, it reflects the full cost of the limited (capital) resources used by a company during a given period. Supporters of EVA include O'Byrne (1996:119), Uyemura, Kantor and Pettit (1996:98) and Grant {1996:44, 1997:39). This research paper has tried to develop a conceptual framework for EVA as a performance measure. The paper encompass the varies conceptual aspects related to the EVA, its calculation, prior research work done in the area, aspects related to corporate sectors and Government and non Government enterprises and finally concluding in the advantages and problems related to it after taking into account the Strength and Weaknesses of the same.