FREE online courses on Financial Management and Creating Value - Chapter 3 -
Some Problems with EVA
Although EVA is a positive step away from the traditional
forms of accounting measurement, it does have its limitations. Part of the
problem is the fact that EVA comes from the very same model that it disputes,
the traditional accounting model. Adjustments are calculated based on the
accounting model to arrive at EVA. These adjustments are to some extent
subjective in nature and thus some distortions can carry over into EVA.
Another problem is how we measure relative value within the
overall marketplace. A company can
experience positive EVA, but have a declining share of value within the
marketplace. If the competition is gaining more and more of the wealth within
the marketplace, it will take a lot more than positive EVA's to sustain
long-term values. Finally, at the beginning of this chapter I mentioned that
value-based metrics is a relatively new field and things are still evolving. To
date, the support for certain metrics like EVA is not very impressive. This
point will become more obvious when we discuss two remaining approaches to
measuring value, Cash Flow Return on Investment and Residual Cash Flow.
