Value Added

Metrics
A group 3 presentation
What Is Economic Value
Added (EVA)?

It is a measure of a
company's financial performance
based on the residual wealth
calculated by deducting its cost of
capital from its operating profit,
adjusted for taxes on a cash basis.

EVA can also be referred to as 

economic profit, as it attempts to
capture the true economic profit
of a company.
When does EVA started?
Stern Stewart & Co. is a consulting company founded in New
York in 1982 by Joel M. Stern and G. Bennett Stewart III.
Stern Stewart & Co. is specialized in value-based management
 and offers its services primarily in the areas of portfolio strategy,
portfolio valuation and corporate management. 
Importance of EVA ?
 Economic Value Added (EVA) is important because it is
used as an indicator of how profitable company projects
are and it therefore serves as a reflection of management
performance.
 
 Advantag
 esEVA takes into
consideration all the cost
including the cost of equity
capital (being ignored in
accounting profit).
summarizes how much and
from where a company
created wealth.
encourages managers to
Disadvantage
 Itsis difficult to calculate
precise and correct cost of
equity. Further, this is not
suitable for all kinds of
companies.
it is not predictive of
future performance,
especially for companies in
the midst of reorganization
The Formula for EVA is:
EVA = Net Operating Profit After Tax or NOPAT – (Invested Capital x WACC)

Example:
Assume that Company XYZ has the following components to use in
the EVA formula:
NOPAT = $3,380,000
Capital Investment = $1,300,000
WACC = .056 or 5.60%

EVA = $3,380,000 - ($1,300,000 x .056) = $3,307,200

Note:
The Company XYZ more than covered its cost of capital. A negative
number indicates that the project did not make enough profit to cover the
cost of doing business.
 Solving Problem
• Cory's Tequila Company (CTC), had 2018 net after-tax operating
profits of $200,000 and invested capital of $2 million at an
average cost of 8.5 percent.
• Economic Profit = Net after-tax operating profit – (Invested Capital
x Percentage Cost of Capital)
= $200,000 - ($2,000,000 x 8.5%)
= $200,000 - $170,000
= $30,000
• A company's profitability can be gauged by calculating EVA, as its
focus is on a business project's profitability and thus the
efficiency of company management.
Importance of EVA ?
 Economic Value Added (EVA) also referred to as 
economic profit, is important because it is used as an
indicator of how profitable company projects are and it
therefore serves as a reflection of management
performance.
The economic value calculation has many advantages. It
summarizes how much and from where a company
created wealth
 is an internal management performance measure that
compares net operating profit to total cost of capital. 
 Economic Value Added (EVA) vs. Market
Value Added (MVA): An Overview
• EVA takes into account the opportunity cost of alternative
investments, while market value added (MVA) does not.
• MVA is not a performance metric like EVA but instead is a wealth
metric, measuring the level of value a company has accumulated
over time.
• Unlike EVA, MVA is a simple metric of the operational capability of
a business and, as such, does not incorporate the opportunity cost
of alternative investments.
 What Is Market Value Added (MVA)?
• Market value added (MVA) is simply a corporate finance
technique in order to measure the success of the business
management team’s use of assets entrusted to them.

• In other words, it is the sum of all capital claims held against

the company plus the market value of debt and equity.

• A high MVA is evidence of effective management and strong

operational capabilities, a good indication they have strong
leadership and sound governance.

• A company’s MVA is an indication of its capacity to increase

shareholder value over time.
 Formula of MVA
• MVA = V - K
• Where:
V = is the market value of the firm, including the
value of the firm's equity and debt
(its enterprise value), and
K = is the total amount of capital invested in the
firm.
MVA Formula
Although one may encounter different formula for computing MVA, the simplest one
is:
MVA = Market Value of Shares – Book Value of Shareholders’ Equity
 
To find the market value of shares, simply multiply the outstanding shares by the
current market price per share. If a company offers owns preferred and ordinary
shares, then the two are summed together to find the total market value.

As an example, consider Company XYZ whose shareholders’ equity amounts to

$750,000. The company owns 5,000 preferred shares and 100,000 common shares
outstanding.
The present market value for the common shares is $12.50 per share and $100 per
share for the preferred shares.
 
Market Value of Common Shares = 100,000 * $12.50 = $1,250,000
Market Value of Preferred Shares = 5,000 * $100 = $500,000
Total Market Value of Shares = $1,250,000 + $500,000 = $1,750,000
 
Using the figures obtained above:
Market Value Added = $1,750,000 – 750,000 = $1,000,000
 Adjusted Formula of MVA
• MVA = Shares Outstanding x Current Share Price –
Shareholder’s Equity
• Example:
• Company A’s stock is currently selling at $5.2 a share,
and the company has a total of 12 million shares
outstanding. The company reports its total
shareholder value to be $26 million.
• Market Value Added (MVA) = 12 x 5.2 – 26 = $36.4
million
 Facts of MVA Application
• Alphabet Inc., (GOOGL) the parent of Google, is among the
most valuable companies in the world with high growth
potential. Its stock returned 1,293% in its first 10 years of
operation. While much of its MVA in the early years can be
attributed to market exuberance over its shares, the company
has managed to nearly triple it over the last five years.
Alphabet’s MVA has grown from $128.4 billion in 2011 to
$354.25 billion in December 2015 to $606.17 billion in
December 2017.
• Coca-Cola Company is one of Warren Buffett’s favorite stock
holdings because its management is so effective at increasing
shareholder value. The company's MVA was $158.52 billion at
the end of year 2017, up from $150.4 billion in 2015 and
$119.8 billion in 2011, and that does not include the nearly $6
billion in dividend payments to shareholders. As of 2016, Coca
Cola has increased its dividends each year for the last 25
years by an average of 8% per year.
FORECASTING EARNINGS AND
CASH FLOW
Type of Forecasting Methods
 FORECASTING
EARNINGS
• Earnings forecasts are based
on analysts' expectations of
company growth and
profitability. To predict
earnings, most analysts build
financial models that estimate
prospective revenues and
costs.
 Importance of Forecasting
Earnings
 The forecasting of a company's earnings is
important to a firm, its creditors, and its investors.

 Earnings are important to shareholders because

dividends are paid based on annual earnings.

 The business prepares its annual earnings forecast as

part of its budget process.
 What's the Basis of Analysts'
Forecasts?
  To predict revenues, analysts estimate sales volume
growth and estimate the prices companies can
charge for the products.
 On the cost side, analysts look at expected changes
in the costs of running the business. Costs include
wages, materials used in production, marketing and
sales costs, interest on loans, etc.
FORECASTING
CASH FLOW

Cash Flow- Definition

is the money coming into and going out of a

business over a period of time. Money comes
in through sales, capital, finance and money
goes through purchases, wages and over
heads.
 The importance of
cash
When Business lack of cash

Business is unable to pay bills/staff

Suppliers stop delivering as they have not

been paid

Business may be taken to court because

they can’t pay creditors

Business becomes insolvent, possibly

leads to bankruptcy.
 Cash Flow Forecast
Importance of Cash Flow

needs a supply of ready money

needs to pay essential debts immediately
needs to maintain a good reputation with
suppliers
needs to reduce finance costs by avoiding
loans
needs to plan ahead for the future
 Cash Flow forecast-
Limitation
• Cash flow estimates and may not be entirely accurate- a
cash deficit may occur if costs are underestimated

• Cash flow forecasts are subject to inaccuracies as the data

may change due to a number of external factors. Including;
Changes in economic conditions, changes in interest rates,
seasonal fluctuations and global events.

• Forecasts only consider cash payments and receipts only-

ignores non cash which reduces profits.
Pro Forma Analysis for
Strategy and Planning
 Pro forma is a Latin term that means “for the sake of
form” or “as a matter of form.” In the world of
accounting and investing, pro forma refers to a method
by which firms calculate financial results using certain
projections or presumptions, as pro forma financial
statements.

 A pro forma analysis is an analytical projection of the

potential financial position of a company based on a
review of historical information, operating metrics,
and potential cost savings due to anticipated changes.
Ex. Established Businesses or New Ventures/Projects.

 A pro forma analysis is one of the main decision-

making tools companies use when reviewing potential
 Key Takeaways when using Pro Forma
Analysis

Pro forma financials can be issued to the

public to highlight certain items for
potential investors, or they can be used
internally by management for business
decisions.
Pro forma financials ignore the effects of
one-time or unusual items, and therefore,
are not presented in compliance with
generally accepted accounting principles
(GAAP).
Pro forma financial results should use the
most conservative possible estimates of
revenue and expense in order to not
mislead investors.

The SEC regulates publicly traded

companies, and it has clarified that it is
illegal and punishable by law to
mislead investors with pro forma
 Basic Benefits of Pro Forma Statements
• Primary Importance - used to create a budget and
determine the need of the company for capital.
• Growth Opportunities- a company can judge whether
growth is worth the risk and cost.
• Capital Investors- It gives confidence to investors, to create
an idea of how the company is going to be profitable.
• Troubleshooting- companies may realize a better way of
doing the same thing.
• Adjustable Projections- they are flexible and allow for things
to be adjusted as needed. 
Used for :
 valuing firms
 granting credit
 acquiring companies
 planning strategy
 Budgeting
Function
A pro forma analysis functions as an analytical tool for
company executives to make complicated and financially
impacting decisions. It can also be used as justification for
the financial cost of major decisions such as a purchasing
another company or implementing a new data management
system.
 Basic Steps to know how to create a
Pro Forma Income Statement

 Step 1: Calculate the estimated revenue

projections for your business (this is called pro
forma forecasting). Use realistic market
assumptions and not just numbers that make you
or your investors feel optimistic.
 
 Step 2: Estimate your total liabilities and costs.
Your liabilities include loans and lines of credit.
Your costs will include items such as your lease
expense, utilities, employee pay, insurance,
 Basic Steps to know how to create a
Pro Forma Income Statement

 Step 3: To create the first part of your pro forma,

you’ll use the revenue projections from Step 1 and
the total costs found in Step 2. This portion of the
pro forma statement will project your future net
income (NI).

 Step 4: Estimate the cash flows. This portion of

the pro forma statement will identify the net effect
on cash if the proposed business change is
implemented.
Sample of Pro Forma Analysis
xisting Business Pro Forma
Income Statement January 2019 July 2019

Revenue PHP 1000 + 30% PHP 1300

COGS PHP 400 = 40% PHP 520

Gross Profit PHP 600 PHP 780

SG&A PHP 350 = 35% PHP 455

Operating Profit PHP 250 PHP 325

Taxes / Other PHP 100 = 10% PHP 130

Net Profit PHP 150 PHP 195

Pro Forma for New Busine
Pro Forma for New
Business
Income Statement Month 1 Month 2

Revenue PHP 1000 PHP 1200

COGS PHP 400 PHP 450 Direct Cost of Producing Revenue

Gross Profit PHP 600 PHP 750

Cost of Running the Business
SG&A PHP 340 PHP 400

Operating Profit PHP 260 PHP 350

Tax / Other Expenses
Taxes / Other PHP 100 PHP 100
Net income
Net Profit PHP 160 PHP 250
Financial Statement (Ratio) Analysis
 Liquidity Ratios
 ratios that show the relationship of a firm’s cash and other current assets to
its current liabilities; they provide an indication of the firm’s ability to meet its
current obligations

Current Ratio= Current Assets/Current Liabilities

Ex. 465/130=3.6x

Quick Ratio= Current Assets-Inventories/Current Liabilities

Ex. 195/130=1.5x
Asset Management
Ratios
 a set of ratios that measure how effectively a firm is managing its
assets.
Inventory Turnover= COGS/Inventory
Ex. 1,230/270=4.6x
Days Sales Outstanding(DSO)= Accounts Receivable/[Annual Sales]/360
Ex. 180/4.17= 43.2 days
Fixed Assets Turnover= Sales/Net Fixed Assets
Ex. 1,500/380=3.9x
Total Assets Turnover= Sales/Total Assets
Ex. 1,500/845=1.8x
Debt Management
Ratios
 ratios the provide an indication of how much debt the firm has
and whether the firm can take on more debt

Debt Ratio= Total Liabilities/Total Assets

Ex. 430/845=50.9%
Times Interest Earned(TIE)= EBIT/Interest Charges
Ex. 130/40=3.3x
 Profitability Ratios
 a group of ratios showing the effect of liquidity, asset management,
and debt management on operating results
Net Profit Margin= Net Profit/Sales
Return On total Assets(ROA)= Net Income/Total Assets
Ex. 54/845=6.4%
Return On Equity(ROE)= Net Income/Common Equity
Ex. 54/415=13.0%
Market Value Ratios
 set of ratios that relate the firm’s stock price to its earnings
and book value per share

Price/Earnings/(P/E) Ratio= Market Price Per Share/Earnings

Per Share
Ex. P23.00/2.16=10.6x
Market/Book(M/B)= Market Price Per Share/Book Value Per
Share
Ex. P23.00/P16.60=1.4X
 End
• Thank you for listening