Eva vs Roi

1145 Words Jan 13th, 2010 5 Pages
Why EVA is better than ROI (ROCE, ROIC, RONA, ROA) and earnings, operating profit etc.
Equity investors should earn on their capital a return far over risk-free interest rate in order to induce and maintain capital in the company
Therefore earnings should always be judged against the capital used to produce these earnings
Earnings can be easily increased simultaneously worsening the position of shareholders e.g. if more capital is poured into! company although the return on capital is 5% or less (even lower than long-term government bond)
Thus it is clear for most people that any earnings figure can not alone be a reliable performance measure (still some companies use EPS !?)
! Following slides focus on explaining why also return on
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EVA, in contrast to ROÍ, is as an absolute measure easy to intégrate into operatíng activities since all cost reductíons and revenue increases are already in terms of EVA (reduction in costs in one period = increase in EVA in the same period). In the similar fashion capital increases /reductíons are also fairly easy to turn into change of EVA
Furthermore EVA is (in contrast to ROÍ) an unambigious measure i.e. increasing EVA increases always the position of shareholders

5 Reason 2: EVA is more practical and understandable than rate of return (ROI...) (3/4)
It is also very common that in ROI-steered companies many employees do not really know what profitability is
Often many educated employees know something about the flaws oí ROÍ and therefore they have some vague conception that real profitability might also improve although ROÍ decreases

3 Since the company does not have any better profitability measures it is admittedly very difficult to get the whole picture about profitability
ROÍ is also too complex consept to explain to all employees (not many companies have succeeded (or even tried) to explain to

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