EVA Value And Stock Price

In a market-driven economy many companies will create wealth. Other firms however will undoubtedly destroy it. Discovering those economic factors that lead to wealth creation and destruction among companies is important to many constituencies, not the least of which is corporate officials and investment managers. For corporate managers wealth creation is fundamental to the economic survival of the firm. Manager that fail (or refuse) to see the importance of this imperative in an open economy do so at the peril of the organization and their own careers.Finding the "best" companies and industries in the marketplace is of primary importance to investment managers. With the proper financial tools, portfolio managers may be able to enhance their active performance over-and-above the returns available on similar risk indexed-passive strategies. An analytical tool called EVA is now assisting this wealth-discovery and company -selection process. One thing that makes EVA so popular is that at its core, it is an almost embarrassingly basic concept. Take a company' s after-tax operating profit. Subtract the cost of capital used to make that profit. It tells us how efficient management is at turning investor money梒apital 梚nto profits. But traditional valuation methods do not look into cost of capital, which means the opportunity cost of investor' s capital is ignored. Traditional measure of economic performance includes earnings per share and return on assets, etc. Earnings per share tells nothing about the cost of generating those profit. If the cost of capital is, say, 15 percent, then a 14 percent earning is actually a reduction, notAbstracta gain, in economic value, because the earning does not cover the cost of capital. Return on assets is a more realistic measure of economic performance, but it ignores the cost of capital. In its most profitable year, for instance, a company' s return on assets is over 11 percent, but with a 13 percent cost of capital it is actually destroying the wealth!In this article, a "generally accepted" boilerplate of accounting adjustment provided by G. Bennett Stewart is deployed to estimate a company' s NOPAT and invested capital.By using a telecommunication company's annual report, the author calculated this company's EVA value throughout total 8 years. Then the author compared this telecommunication company's EVA value chart with its stock price chart over the 8 years to research the relationship between EVA and its stock price. Basically a positive EVA means value creation while a negative EVA means value destruction. A positive EVA growth is a good sign that a stock will soar while a negative EVA growth is a bad sign that a stock will fall down. The author also explores how to calculate AEVA with a new growth opportunity and the theoretically possible changes of its stock price. Upon reaching the relationship between EVA and stock price, the author then discussed what kinds of management decisions that corporate manager make to bring up EVA value. Such research work has practical meaning to investors and corporate managers. It can be used to evaluate corporate value, forecast the trend of stock price and select outstanding companies for a better investment decision.Xu Weizhen (Finance) Directed by: Professor Yang Chunpeng...