7. The EVA, the EVAC and the EVACp

Chapter 7


by: josavere

From the first stages of the development of the finances two indicators are known; one very used the patrimonial yield (net profit/patrimony) and the other, according to a wide investigation, ignored: the cost of capital. The EVA (trademark) combined these two indicators to calculate the index of value generation which is the result of the yield index minus the cost of capital.



net profit




cost of capital

If the indicator is superior to zero (positive) the company is generating value, as many as many times surpass it. In the opposite case, value is being destroyed. The concept explained is very easy to understand, but practical effects needed a very complete analysis. Let us begin by saying that generating value must have a patrimonial growth in real terms; it has to be superior to the increase of inflation.

The cost of capital is a quiet topic that requires separated analysis; in this chapter, we assume that it is known and, therefore, we do not discuss it. Then let us concentrate on the patrimonial indicator.

In some countries, the accounting direction has been always tax, which means, that reducing the payment of taxes looks like being the dominant objective, the amount that is calculated as a percentage of the profit. For obvious reasons, in order to pay fewer taxes, a presentation looking like the benefit is reduced must be searched, whit respect to the accounting principles, which takes to hidden reserves that increase the patrimony. When presenting fewer gains, as an obvious consequence, also fewer dividends are paid. The small shareholders, generally the most misinformed, calculate the yield like a relation between the dividend and the value of the shared.






price of the share

In the meantime, the big investors know about the hidden reserves and they do not need the dividends for their expenses of consumption. In principle by the deduction of interests before paying taxes, the debt is less expensive for the company and as a consequence, the growth by means of indebtedness has made a race and therefore a predisposition to pay high interest rates.

The big investors, well informed and aware, found an excellent business and buy undervalued shared and followed, they concentrated the companies in a few owners and, in general, to be undervalued and the cost of the equity capital has practically been ignored. This explains, partly, some companies are destroying value without becoming aware of it.

Around the world notices a generalized tendency to impose EVA as the indicator of excellence and as the economy is getting global, international investors can easily have the information through INTERNET, and act by means of electronic; it prevails the value generation in order to compete for the capital.

The formula as it appears is very short-term. The accounting maintains a great delay with relation to the development of the administration and the managers have an immense responsibility in the long term, which implies a series of expenses that have an investment character (sacrifice present profits to increase the value in the long term). So that the permanence a company requires interweaving in the society; must be part of it, to become a contributor to the development, and the personal growth of the public, to those to which it is related. Will it make have to sense any enterprise activity without the benefit of the man?

In finance indicate an axiomatic objective: to increase the value of the company for the shareholders. Let us complement this objective by saying that he must have a TANGIBLE benefit FOR ALL the SHAREHOLDERS, which is obtained by increasing the price of the share in the market with a high index of the stock exchange.

The only way to accomplish the objective of increasing the market value of the share is by adding value in a sustained way thus this share would be demanded by the investors. Still, the dividend could be suppressed and leave each investor individually when it wants, simply selling its share in the stock market. Increasing the value or increasing the EVA is the result of an efficient administration, with high indexes of productivity. We should not make the mistake of thinking solely about what is measurable with simple formulas of industrial engineering as the productivity of the manual labor, which simply is a component of the cost, even though in certain cases represents a high proportion.

Must watch the complete productive apparatus and look for the productivity of the raw material (reducing the waste), the physical plant (taking advantage of the local goods), the machinery (avoiding machine idleness), and in special, the executives of the organization should constitute an integrated team. Because the efficiency begins in the taking of orders and it takes shape by receiving timely at profitable prices, to a client widely satisfied, with the required expenses and minimum costs, using the responsibility centers as a managerial tool.

Every project must be evaluated based on the rate of cut, indicator fixed by enterprise policy and that must be fixed looking for value generation. Investments in all that concern the preservation of the environment (norm ISO 14,000); personal growth and technical qualification for the workers, research and development; publicity oriented to the positioning must be treated as an increase in the value.

It is important to write down that the stock exchange indicators are calculated with past data; the investor is deciding for a future. That is the reason why it is needed to create informing projected results and properly sustained culture, because the joint-stock companies, handle public money.

In the periodical information that the management presents to the general assembly of shareholders, the earnings statement, sources and applications of funds, and balance sheet. It would be very convenient to make a comparison of the previous period (numbers adjusted by inflation indexes) with the results of the period and a projection at the beginning of the period.

HEADINGS (million $)








net profit












If a company shows a high-value generation projection, with supported data its shares in the market will be demanded, appearing also the opposite situation. The phenomenon would be increasing meanwhile the credibility indicators take force.

Logically, a good statistical database is required, allowing making projections that interpret the technique faithfully so that these have solidity and fulfill their true assignment. We must be very careful and not make "well-based" mistakes because of the wrong use of the statistic; this is a very common mistake.

Little by little, the comparison of the real results with projections and its corresponding analyses, will serve as a base to improve the system and establish credibility indicators, which will allow making the pertinent adjustments so the potential investors have more elements of judgment to make their decisions.

(index corrected and projected of value generation) special care must be taken to this relation that is suggested to incorporate because the new tendencies in the financial world are oriented to take it as an international indicator that guides the attitude of the investors, no matter where the company operates.

It would be highly convenient for the preparation of a matrix that integrates the yield over the patrimony with the cost of capital. In the document about this subject, we indicated how the matrix is constructed and for the calculation of EVA, the procedure is very similar.


awaited yield


projected profit



Accelerated depreciation, the cost by LIFO, etc. have contributed as mechanisms of defense against inflation, to generate hidden reserves and reduce the profit and as a logical consequence, the taxing rates.

The approach is so short-term that turns out to treat as expenses like investigation and development; the appropriations for position combined with the necessary talent, especially in the virtual company, based on two supports: the knowledge and the confidence is necessary to make concerted efforts in the development of the person so his behavior could give us the tranquility as far as the confidence we can deposit in him the same that has been registered as costs and the investments in the qualification and the development of the human talent must be capitalized.

Many persons are going to work wherever he wants, whenever and how they want; developing the person is necessary to make great investments to enable him in the office to be able to increase the knowledge that brings enough capacity to face the global competition.

The social investment that a company requires to be recognized and esteemed in the society; the patents and other intangible assets, adding values that even though are treated as expenses, represent true investments that must be used to complement the indicator of patrimonial yield.

Of course, is needed a consensus from those who take care of the financial statements including the risk-proofing companies, and a special analysis to the account of the patrimony to make the adjustments that it requires. A great criterion is required to sustain it and an explanatory note is associated with the balance sheet.

Thus introducing a new measure: that first of all, it is a long-term managerial philosophy that needs a measure of results.


corrected and projected EVA


profit of the period


investments in research and development


investments in training to be capitalized publicity








adjustments to the patrimony


cost of capital

We conclude by saying that first of all, it is a long-term managerial philosophy that needs a measure of results.

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