Vidyasagar University Journal of Commerce Vol.11, March 2006
EVA BASED PERFORMANCE MEASUREMENT: A CASE STUDY OF DABUR INDIA LIMITED Debdas Rakshit*
Traditional measures of corporate performance are many in number. Measures using common bases are Net Profit Margin, Operating Profit Margin, Return on Investment (ROI), Return on Net Worth (RONW), Earning Per Share (EPS) etc. Among these, again ROI is recognized as the most popular yardstick of overall performance. But it is often argued that, in general, these traditional measures fail to identify the true surplus. Economic Value Added (EVA) is advocated as a new measure of corporate performance that focuses on clear surplus in contrast to the traditionally used profit based indicators. For evaluation of the efficiency of any decision, value creation or value addition aspect is of utmost importance in the present backdrop of corporate governance. Although adopting a holistic approach safeguarding the interests of all stakeholders is being emphasized and rightly so, it should be kept in mind that value creation or value addition aspect is of prime consideration in the assessment of the corporate policy guidelines. If that is not satisfied, wrong signals will be emitted from securities market and the continuance of the operations of the entity will be at stake. In view of the above considerations, in the present paper an attempt has been made to analyse the financial performance of Dabur India Limited by using EVA.
Introduction The term ‘Economic Value Added (EVA)’ is a registered trademark of Stern Stewart & Co. of New York City (USA). Bennett Stewart in his book, “The Quest for Value”, used the term EVA with a symbol ™ as super script, which is the normal practice of referring to any registered trademark whenever the term is used. Thus EVA is actually Stern Stewart & Co.’s trademark for a specific method of calculating economic profit. “The Quest for Value” was published in 1991. Peter Drucker claimed that he discussed EVA in 1964 in his book, “Managing for Results”. It cannot be denied, however, without going into argument as to who invented EVA first that the concept became popular only after Stern Stewart & Co. marketed it. *Faculty Member, Department of Commerce, The University of Burdwan, Burdwan - 713104.
Just earning profit is not enough, a business should earn sufficient profit to cover its cost of capital and create surplus to grow. Stated simply, any profit earned over and above the cost of capital is Economic Value Added. Traditionally the methods of measurement of corporate performance are many. Common bases used are: - Net Profit Margin (NPM), Operating Profit Margin (OPM), Return on Investment (ROI), Return on Net Worth (RONW) etc. Profit After Tax (PAT) is an indicator of profit available to the shareholder and Profit Before Interest After Tax (PBIAT) is an indicator of the surplus generated using total funds. ROI is still recognized as the most popular yardstick of profitability measurement. However, the traditionally used profit indicators are ineffective parameters in explaining whether the reported profit covers the cost of capital. Old profit concept fails to indicate clear surplus. The basic proposition is that the Return on Capital Employed should be greater than the Cost of Capital (i.e. ROCE > K0). Capital Employed highlights long term capital and cost of capital represents weighted average cost of capital. Traditionally, Profit After Tax is shown in the Profit & Loss Account to indicate the profit available to the shareholders, both preference and equity. Ability to maintain dividend is not a test of profit adequacy. Ability to generate Economic Value Added is the only test of profit adequacy. Any surplus generated from operating activities over and above the cost of capital is termed as EVA. It is a new measure of corporate surplus that should be shared by the employees, management and shareholders. EVA...
Please join StudyMode to read the full document