Research On Theory And Application Of EVA

The traditional system of performance evaluation and encouragement has been questioned and challenged by more and more scholars since 1990s. The objective of the company is to maximize shareholder's value, which should be thereby reflected through performance measurement. However, the traditional accounting profit and resulting measurement cannot truly indicate shareholder's value creation, partly because they neglect the cost of equity and can lead to value distortion subject to accounting principles. So, EVA pattern, due to its principle of taking the cost of equity into account, has been applied widely in theory and practice. Some scholars even call it "EVA revolution".EVA is the abbreviation of Economic Value Added. It underlies shareholder's value and takes account of the cost of the capital employed. EVA is easy for understanding and performing and can make the goal congruence between managers and shareholders. Meanwhile EVA is closely related to NPV. The essence of EVA includes four parts, which are: Measurement, Management, Motivation, Mindset. Under the new economic environment EVA helps firms to improve economic effect, make correct policy, perfect management and create wealth for shareholders. After analyzing the data of 30 pharmaceutical public companies' annual financial report, this paper concludes that there is a close relationship between EVA and EPS, and that is 0.6. However, as far as our country is concerned, the theory of EVA still has some existent questions that need to be resolved.