Economic Value Added

4175 Words Jun 2nd, 2012 17 Pages
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The Real Key To Creating Wealth
Rewarded by knockout results, managers and investors are peering into the heart of what makes businesses valuable by using a tool called Economic Value Added.
September 20, 1993 By Shawn Tully

WHAT IF you could look at almost any business operation and see immediately whether it was becoming more valuable or less? What if you as a manager could use this measure to make sure your operation—however large or small—was increasing in value? What if you as an investor could use it to spot stocks that were far likelier than most to rise high? What if using this measure would give you a marked competitive advantage, since most managers and investors aren 't using it? There is such a
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' 'How we use capital determines market value. ' ' Snow has lots of capital to worry about, a mammoth fleet of locomotives, containers, and railcars. His stiffest challenge came in the fast-growing but low-margin CSX Intermodal business, where trains speed freight to waiting trucks or cargo ships. Figuring in all its capital costs, Intermodal lost $70 million in 1988. In other words, its EVA was negative $70 million. Snow issued an ultimatum: Get that EVA up to breakeven by 1993 or be sold. Freight volume has since swelled 25%, yet the number of containers and trailers—representing a lot of capital—has dropped from 18,000 to 14,000. They used to sit in terminals for two weeks between runs, but once CSX managers started seeing them as expensive, idle capital, they figured out ways to return them to the rails in five days. This is hardly rocket science. But before EVA, no one had done it; no one had had enough incentive to do it. The company is also making do with a locomotive fleet of 100 instead of 150, a $70 million reduction in capital. How? On the route from New Orleans to Jacksonville, Florida, four locomotives used to power trains at 28 mph. But the trains arrived at midnight, long before they were unloaded onto trucks or freighters. Spurred by the EVA imperative, CSX decided to run the trains at 25 mph with only three locomotives and arrive three hours later, still in plenty of time to be unloaded at

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