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1、New York Chicago Los Angeles London Paris Milan Munich TokyoSao Paulo Singapore Sydney Johannesburg ShanghaiIntroduction to EVA Management System ContentsvWhat is EVA?vThe calculation of EVAvThe EVA management systemContentsvWhat is EVA?vThe calculation of EVAvThe EVA management systemEVA is Earning
2、s After the Cost of CapitalRevenues- Operating Costs- Depreciation-/+ Adjustments- Taxes= Operating Income After Tax (NOPAT)-Capital x c% Capital Charge= EVA Objective: Objective: Continuous Improvement in EVAContinuous Improvement in EVAP/LB/SThe intrinsic value is the determinant of the market val
3、ue in efficient capital marketIntrinsic Intrinsic Intrinsic valuevaluevalueFinancial Financial Financial measuresmeasuresmeasuresOperating Operating Operating metricsmetricsmetrics MVA, Stock price EVA ROI, Capital turnover, margin Market share, Unit cost, scrap rate, delivery timeCompetitive strate
4、gyBusiness modelManagement systemOperating efficiencyMarket Market Market valuevaluevalueUS as exampleUS as example50%40%30%20%10%Correlation with stock priceEVA ROE Cash Flow EPS RevenueAs a measure of business intrinsic value, EVA correlates with stock price better than other measuresEVA measure g
5、ives more insights into the businessFrom Enrons 2000 Annual Report (Letter to Shareholders):Enrons performance in 2000 was a success by any measureThe companys net income reached a record in 2000. Enron is laser-focused on earnings per share, and we expect to continue strong earnings performance.(in
6、 mil)Net IncEPSEVA(in mil)ContentsvWhat is EVA?vThe calculation of EVAvThe EVA management system 9From the traditional accounting model to the economic model of the firmAccountingFrameworkEVAFrameworkAdjustmentsP&LBalance SheetCash Flow StatementNOPATCapitalEVAvSeparate financing effects from operat
7、ing performancevExtend matching of costs with revenue to economic basis vSeparate operating from non-operatingvEliminate book keeping entries/reserves that distort cash flow and reduce objectivitySo as tovTo better reflect value creationvTo motivate the right value-creating behavior 10Optimizing the
8、 EVA MeasurevMaterialityDifference in EVA with or without adjustment Is it material?Set a rule of thumb and use common sensevMotivationAdjustment must motivate managers to do the right thingStart with dysfunctional behaviors in standard operating proceduresvData AvailabilityCost of collecting inform
9、ation must be reasonablevSimplicityEVA is for operating people keep it simpleA fully adjusted EVA is too complicated to use and communicate 11The EVA Calculation Precision VariesBasic EVATailored EVATrue EVADisclosed EVA 12ADJUSTMENTSCash toEconomicNon-operatingItemsNon-recurringEventsAccrual toCash
10、Accounting conservatism treats many investments as current expenses (R&D, significant Marketing/Training - only those specifically relating to a “strategic”purpose) EVA views them as investments in the future Accounting misstates cash flow(Reserves)EVA seeks to emphasize actual cash eventsAccounting
11、 distorts ongoing operating performance(Restructuring and Asset sales)EVA treatment avoids profit peaks and troughsItems not included in the normal course of business, or not usually managed at unit level (Interest Expense from Debt; Other Financing)In the EVA framework, we must turn the accounting
12、model into an economic model 13 Cost of Debt Cost of Capital ? %+Cost of Equity? %? %The cost of capital comprises both debt & equity costsRisk Free RateEquity Risk PremiumDebt Premium (Credit spread) 14Cost ofEquity Capital (required return byequity holders)Risk ()Risk-FreeRate RfMarket Risk Premiu
13、mMRP(Rm - Rf )Relationship between Risk and ReturnMarket Risk = 1Cost of Equity = Rf + (Beta x MRP)A Beta value is required to determine cost of equity 15In general, a higher business risk implies higher beta value, hence higher cost of equity 16To calculate Beta, a list of peers need to be identifi
14、ed for ClientvA peer company is not necessarily a competitor, but rather a company engaged in principally similar business subject to the same underlying economic forces. They may be competitors or companies in similar industries and business environments.vPeer comparisons are used to :Derive Betas
15、for the respective business units and the corporation to facilitate cost of capital (COC) calculations. Non-listed companies, wholly-owned subsidiaries and business units do not have publicly traded shares from which to measure the levered Betas. Where possible, a pure-play analysis of publicly trad
16、ed peer companies is used to estimate the unlevered Beta, or BRI. This is then translated into the levered Beta for that company, using the capital structure and the cost of debt.Benchmark EVA performance and identify value drivers.ContentsvWhat is EVA?vThe calculation of EVAvThe EVA management syst
17、em 18StrategyStrategyFormationFormationGoal SettingGoal SettingPlanning &Planning &BudgetingBudgetingExecutionExecutionEvaluationEvaluationMotivationMotivationEVAEVAEVAEVAEVAValue Value BasedBasedManagementManagementEVA provides a comprehensive value management framework to translate strategy into a
18、ction 20Goal setting and benchmarking 21In the EVA framework, Market Value can be broken down into Future Growth Value and Current Operations Value CapitalPV of current EVA in perpetuityPV of EVA ImprovementMVA = Present Value of Current EVA + Present Value of Expected Improvements to Current EVAFut
19、ure Growth Value (FGV)CurrentOperationsValue (COV)MarketValueMarket Value Added(MVA)Capital 22Future growth value represents an expectation of increase in EVAMarketValueCurrent OperationsValue(COV)Future Growth Value (FGV)Expected Improvementsin EVAqFuture Growth Value represents the premium on the
20、value of current operations (Capital + EVA/c*).qThe presence of a Future Growth Value, which equals PV of all future EVA improvements, signals the managers that owners/investors expect increases in EVA.qIncreases in EVA will also drive increases in MVA. As a result Investor Wealth will go up as well
21、. 23Applying “industry average growth expectations” to Clients 1999 EVA, we estimate an FGV of $691mFGV 39%COV 61%1999 Client EVA1999 COV 1,069mFGV ?vIf we know Clients 1999 COV is $1060m (COV = 1999 capital + 1999 EVA / WACC) then we can calculate FGV based on the industry average COV:FGV ratio of
22、69:31v1999 EVA could be considered an abnormally good year for Client, so applying an average EVA from 97-00 (a lower EVA), the FGV for Client would come out to $319MEstimated FGV(using 1999 EVA)FGV 691mConservativeClients Industry Ratio1999COV 1,069mCAPITAL526mEVA / C544mEstimated FGV(using avg. 97
23、-00 EVA)FGV 319m97-00COV 493m 24Taking Clients FGV of $691m, we convert it into implied annual Expected Improvements in EVA (EI) 2000 COV$(18m)FGV$691m20012003200220042005 . 2010Expected Improvement (EI) $26 millionMarket Value$673MAssuming Client were to achieve this EVA growth over a 10 year perio
24、d, annual EVA improvements would have to be $26 million a year.FGVEI (for 10 Years)Aggressive$691m$26m per yearConservative$319m$12m per year 25To achieve EIs, management should first understand the current EVA by focusing on return on capitalMargin xTurnover =ROCScenario A 20%x0.75= 15%Scenario B 5
25、%x3.0= 15%NOPATCapitalProfitMarginCapitalTurnoverXReturn Return on Capitalon CapitalNOPATSalesSalesCapitalXorDissecting the rateof return brings to lightthe trade-offs betweenprofit margin andcapital efficiency.= A company could achieve a 15% return by either: 26A company can use ROC curves to under
26、stand and map out its strategy to improve returns 27Client 1999Client 2000Client peers use fundamentally different business strategies to create value in the industry 28Total Operation Expense Margin0%20%40%60%80%100%120%BaltransEGLExped.Client 1999Client 2000AirborneAtlasCNFFedexUPSAverage% of Sale
27、sNOPAT Margin-5%0%5%10%15%20%25%30%35%BaltransEGLExped.Client 1999Client 2000AirborneAtlasCNFFedexUPSAverage% of SalesVariable Expenses Margin0%10%20%30%40%50%60%70%80%EGLExped.Client 1999Client 2000AirborneAtlasFedexUPSAverage% of SalesFixed Expenses Margin0%10%20%30%40%50%60%70%80%90%EGLExped.Clie
28、nt 1999Client 2000AirborneAtlasFedexUPSAverage% of SalesBenchmarking NOPAT margins give Client a sense of how it falls in terms of operating efficiencyNote: Baltrans and CNF removed from Variable and Fixed Expense drivers analysis due to insufficient data 29Capital Charge Margin0%5%10%15%20%25%30%35
29、%40%BaltransEGLExped.Client 1999Client 2000AirborneAtlasCNFFedexUPSAverage% of SalesNWC Capital Charge Margin0%1%2%3%4%5%6%7%BaltransEGLExped.Client 1999Client 2000AirborneAtlasCNFFedexUPSAverage% of SalesFixed Assets Charge Margin0%5%10%15%20%25%BaltransEGLExped.Client 1999Client 2000AirborneAtlasC
30、NFFedexUPSAverage% of SalesOther Capital Charge Margin-2%0%2%4%6%8%10%12%BaltransEGLExped.Client 1999Client 2000AirborneAtlasCNFFedexUPSAverage% of SalesCapital benchmarking points to working capital and fixed assets as an opportunity for Client to drive EVA upwards 30Summary of Benchmarking study 1
31、999 Data In Thousands of USD Company / ItemsBaltransEGLExped. Client 1999Client 2000 AirborneAtlasCNFFedexUPSAverageBest in ClassSales100%100%100%100%100%100%100%100%100%100%100%100%Var. Exp / Sales97%62%69%34%54%34%11%N/A14%8%17%8%Fixed Exp / SalesN/A16%23%45%45%58%59%94%79%78%74%16%Selling / Sales
32、 N/A15%1%1%1%2%0%N/A0%0%1%0%- Operation Expenses / Sales97%92%94%80%101%95%71%94%93%85%88%23%- Tax / Sales0%3%1%1%0%2%12%2%5%4%5%0%+ Other Income / Sales2%1%0%0%0%1%15%1%4%-6%3%15%= NOPAT Margin5%5%5%20%-1%4%32%5%7%5%7%NWC Charge / Sales1%1%1%6%6%0%5%0%0%1%1%0%Fixed Assets Charge / Sales1%0%1%2%3%3%
33、21%2%4%5%7%2%Other Assets Charge / Sales0%1%0%-1%3%1%10%2%5%0%4%0%- Capital Charge / Sales3%3%2%8%12%5%36%4%9%6%12%= Net Margin2%2%3%11%-13%-1%-4%1%-2%-1%-5%x Sales172,127595,1731,444,57519,53413,4183,140,226637,0815,592,81016,773,47027,052,000=EVA3,25912,63845,4452,240(1,726)(24,340)(22,405)68,874(
34、361,190)(261,400) 31Looking at best in class Margin and Turnover, we can chart the EVA of Client under different scenarios(B)Achieve Best in Class Turns(D)Achieve Best in Class ROC(A)Achieve Best in Class NOPAT Margin(C)Also Best in Class TurnsHistoryPeer BenchmarkClient ForecastClient 97-99Best In
35、Class 97-99CompanyClient, Inc. 2000-2005NOPAT Margin15.0%25.6%Atlas Air7.5%Capital Turnover 313.6%505.0%Expeditors266.1%Return on Capital45.2%45.2%Client, Inc.23.0% 32Client Best In Class Analysis(86,325)138,666146,19056,438146,190 (100,000)(50,000)050,000100,000150,000200,000Current EVAAchieve NOPA
36、Tmargin of 25.6%Achieve Cap. T/O of5xAchieve ROC = 45%EVA USD000sEVA improve by $224,991EVA improve by $142,763Is there Trade off between capital T/O and Nopat Margin?EVA improve by a further $7,524Using Clients 2000 EVA as an illustration, the largest EVA opportunity is from NOPAT margin improvemen
37、t (A)(B)(C)(D)Client Best In Class Analysis, in Thousand DollarsCurrent EVAAchieve NOPAT MarginAchieve Capital TurnsAchieve NOPAT Margin & Capital TurnsAchieve Return on CapitalSales670,895670,895670,895670,895670,895NOPAT(4,080)171,829(4,080)171,82998,516Avg Capital426,138426,138132,846132,846218,018WACC19.3%19.3%19.3%19.3%19.3%EVA(86,325)138,666(29,720)146,19056,438 33The industry value-based strategy map indicates the markets approval of certain business strategies
