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1、New York Chicago Los Angeles London Paris Milan Munich TokyoSao Paulo Singapore Sydney Johannesburg Shanghai,Introduction to EVA Management System,Contents,What is EVA?The calculation of EVAThe EVA management system,Contents,What is EVA?The calculation of EVAThe EVA management system,EVA is Earnings
2、 After the Cost of Capital,Revenues-Operating Costs-Depreciation-/+Adjustments-Taxes=Operating Income After Tax(NOPAT)Capital x c%Capital Charge=EVA,Objective:Continuous Improvement in EVA,P/L,B/S,The intrinsic value is the determinant of the market value in efficient capital market,Intrinsic value,
3、Financial measures,Operating metrics,MVA,Stock price,EVA,ROI,Capital turnover,margin,Market share,Unit cost,scrap rate,delivery time,Competitive strategyBusiness modelManagement systemOperating efficiency,Market value,US as example,50%,40%,30%,20%,10%,Correlation with stock price,EVA ROE Cash Flow E
4、PS Revenue,As a measure of business intrinsic value,EVA correlates with stock price better than other measures,EVA measure gives more insights into the business,From Enrons 2000 Annual Report(Letter to Shareholders):,Enrons performance in 2000 was a success by any measureThe companys net income reac
5、hed a record in 2000.Enron is laser-focused on earnings per share,and we expect to continue strong earnings performance.,(in mil),Net Inc,EPS,EVA,(in mil),Contents,What is EVA?The calculation of EVAThe EVA management system,From the traditional accounting model to the economic model of the firm,Sepa
6、rate financing effects from operating performanceExtend matching of costs with revenue to economic basis Separate operating from non-operatingEliminate book keeping entries/reserves that distort cash flow and reduce objectivitySo as toTo better reflect value creationTo motivate the right value-creat
7、ing behavior,Optimizing the EVA Measure,MaterialityDifference in EVA with or without adjustment Is it material?Set a rule of thumb and use common senseMotivationAdjustment must motivate managers to do the right thingStart with dysfunctional behaviors in standard operating proceduresData Availability
8、Cost of collecting information must be reasonableSimplicityEVA is for operating people keep it simpleA fully adjusted EVA is too complicated to use and communicate,The EVA Calculation Precision Varies,Basic EVA,Tailored EVA,True EVA,Disclosed EVA,Cash toEconomic,Non-operatingItems,Non-recurringEvent
9、s,Accrual toCash,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 event
10、s,Accounting distorts ongoing operating performance(Restructuring and Asset sales)EVA treatment avoids profit peaks and troughs,Items 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 a
11、ccounting model into an economic model,Cost of Debt,Cost of Capital?%,+,Cost of Equity,?%,?%,The cost of capital comprises both debt&equity costs,Risk Free Rate,Equity Risk Premium,Debt Premium(Credit spread),A Beta value is required to determine cost of equity,In general,a higher business risk impl
12、ies higher beta value,hence higher cost of equity,To calculate Beta,a list of peers need to be identified for Client,A 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 c
13、ompanies in similar industries and business environments.Peer comparisons are used to:Derive Betas 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
14、 from which to measure the levered Betas.Where possible,a pure-play analysis of publicly traded 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 i
15、dentify value drivers.,Contents,What is EVA?The calculation of EVAThe EVA management system,StrategyFormation,Goal Setting,Planning&Budgeting,Execution,Evaluation,Motivation,EVA,EVA,EVA,EVA,EVA,Motivation Strategy Goal Setting Planning Execution Evaluation&Budgeting,Value BasedManagement,EVA provide
16、s a comprehensive value management framework to translate strategy into action,From EVA Goal Setting to Execution,EPS Consensus EstimatesIndustry Data BenchmarkingInternal forecasts,Simulations of past history,Client Strategic Goals,Consolidated EVA Growth Goal,Business Unit EVA Growth Goals,Operati
17、ng Plans,Capital Plans,Results/OutlookReporting,EVA Plans,Reasonableness Check,Market Expectations,Internal Forecasts,Accuracy Check,Goal setting is not an issue of the right number,but one of alignment,ALIGNMENT,Goal setting and benchmarking,In the EVA framework,Market Value can be broken down into
18、 Future Growth Value and Current Operations Value,MVA=Present Value of Current EVA+Present Value of Expected Improvements to Current EVA,Future growth value represents an expectation of increase in EVA,MarketValue,Expected Improvementsin EVA,Future Growth Value represents the premium on the value of
19、 current operations(Capital+EVA/c*).The presence of a Future Growth Value,which equals PV of all future EVA improvements,signals the managers that owners/investors expect increases in EVA.Increases in EVA will also drive increases in MVA.As a result Investor Wealth will go up as well.,Applying“indus
20、try average growth expectations”to Clients 1999 EVA,we estimate an FGV of$691m,FGV 39%,COV 61%,1999 Client EVA,1999 COV 1,069m,FGV?,If 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 69:311999 EVA could be cons
21、idered 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$319M,Estimated FGV(using 1999 EVA),FGV 691m,ConservativeClients Industry Ratio,1999COV 1,069m,CAPITAL526m,EVA/C544m,Estimated FGV(using avg.97-00 EVA),FGV 319m,97-00COV 4
22、93m,Taking Clients FGV of$691m,we convert it into implied annual Expected Improvements in EVA(EI),2000 COV$(18m),FGV$691m,2001,2003,2002,2004,2005.2010,Expected Improvement(EI)$26 million,Market Value$673M,Assuming Client were to achieve this EVA growth over a 10 year period,annual EVA improvements
23、would have to be$26 million a year.,FGVEI(for 10 Years)Aggressive$691m$26m per yearConservative$319m$12m per year,To achieve EIs,management should first understand the current EVA by focusing on return on capital,MarginxTurnover=ROCScenario A20%x0.75=15%Scenario B5%x3.0=15%,NOPATCapital,Return on Ca
24、pital,Dissecting the rateof return brings to lightthe trade-offs betweenprofit margin andcapital efficiency.,=,A company could achieve a 15%return by either:,A company can use ROC curves to understand and map out its strategy to improve returns,Client peers use fundamentally different business strat
25、egies to create value in the industry,Total Operation Expense Margin,0%,20%,40%,60%,80%,100%,120%,Baltrans,EGL,Exped.,Client 1999,Client 2000,Airborne,Atlas,CNF,Fedex,UPS,Average,%of Sales,NOPAT Margin,-5%,0%,5%,10%,15%,20%,25%,30%,35%,Baltrans,EGL,Exped.,Client 1999,Client 2000,Airborne,Atlas,CNF,F
26、edex,UPS,Average,%of Sales,Variable Expenses Margin,0%,10%,20%,30%,40%,50%,60%,70%,80%,EGL,Exped.,Client 1999,Client 2000,Airborne,Atlas,Fedex,UPS,Average,%of Sales,Fixed Expenses Margin,0%,10%,20%,30%,40%,50%,60%,70%,80%,90%,EGL,Exped.,Client 1999,Client 2000,Airborne,Atlas,Fedex,UPS,Average,%of Sa
27、les,Benchmarking NOPAT margins give Client a sense of how it falls in terms of operating efficiency,Note:Baltrans and CNF removed from Variable and Fixed Expense drivers analysis due to insufficient data,Capital Charge Margin,0%,5%,10%,15%,20%,25%,30%,35%,40%,Baltrans,EGL,Exped.,Client 1999,Client 2
28、000,Airborne,Atlas,CNF,Fedex,UPS,Average,%of Sales,NWC Capital Charge Margin,0%,1%,2%,3%,4%,5%,6%,7%,Baltrans,EGL,Exped.,Client 1999,Client 2000,Airborne,Atlas,CNF,Fedex,UPS,Average,%of Sales,Fixed Assets Charge Margin,0%,5%,10%,15%,20%,25%,Baltrans,EGL,Exped.,Client 1999,Client 2000,Airborne,Atlas,
29、CNF,Fedex,UPS,Average,%of Sales,Other Capital Charge Margin,-2%,0%,2%,4%,6%,8%,10%,12%,Baltrans,EGL,Exped.,Client 1999,Client 2000,Airborne,Atlas,CNF,Fedex,UPS,Average,%of Sales,Capital benchmarking points to working capital and fixed assets as an opportunity for Client to drive EVA upwards,Summary
30、of Benchmarking study,1999 Data In Thousands of USD,Company/Items,Baltrans,EGL,Exped.,Client 1999,Client 2000,Airborne,Atlas,CNF,Fedex,UPS,Average,Best in Class,Sales,100%,100%,100%,100%,100%,100%,100%,100%,100%,100%,100%,100%,Var.Exp/Sales,97%,62%,69%,34%,54%,34%,11%,N/A,14%,8%,17%,8%,Fixed Exp/Sal
31、es,N/A,16%,23%,45%,45%,58%,59%,94%,79%,78%,74%,16%,Selling/Sales,N/A,15%,1%,1%,1%,2%,0%,N/A,0%,0%,1%,0%,-,Operation Expenses/Sales,97%,92%,94%,80%,101%,95%,71%,94%,93%,85%,88%,23%,-,Tax/Sales,0%,3%,1%,1%,0%,2%,12%,2%,5%,4%,5%,0%,+,Other Income/Sales,2%,1%,0%,0%,0%,1%,15%,1%,4%,-6%,3%,15%,=,NOPAT Mar
32、gin,5%,5%,5%,20%,-1%,4%,32%,5%,7%,5%,7%,NWC Charge/Sales,1%,1%,1%,6%,6%,0%,5%,0%,0%,1%,1%,0%,Fixed Assets Charge/Sales,1%,0%,1%,2%,3%,3%,21%,2%,4%,5%,7%,2%,Other Assets Charge/Sales,0%,1%,0%,-1%,3%,1%,10%,2%,5%,0%,4%,0%,-,Capital Charge/Sales,3%,3%,2%,8%,12%,5%,36%,4%,9%,6%,12%,=,Net Margin,2%,2%,3%
33、,11%,-13%,-1%,-4%,1%,-2%,-1%,Looking 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 Turns,History,Peer Benchmark,Client Forecast,Clie
34、nt 97-99,Best In Class 97-99,Company,Client,Inc.2000-2005,NOPAT Margin,15.0%,25.6%,Atlas Air,7.5%,Capital Turnover,313.6%,505.0%,Expeditors,266.1%,Return on Capital,45.2%,45.2%,Client,Inc.,23.0%,Client,Best In Class Analysis,(86,325),138,666,146,190,56,438,146,190,(100,000),(50,000),0,50,000,100,000
35、,150,000,200,000,Current EVA,Achieve NOPAT,margin of 25.6%,Achieve Cap.T/O of,5x,Achieve ROC=45%,EVA USD000s,EVA,improve by,$224,991,EVA,improve by,$142,763,Is there,Trade off,between,capital T/O,and Nopat,Margin?,EVA improve,by a further,$7,524,Using Clients 2000 EVA as an illustration,the largest
36、EVA opportunity is from NOPAT margin improvement,(A),(B),(C),(D),Client Best In Class Analysis,in Thousand Dollars,Current EVA,Achieve NOPAT Margin,Achieve Capital Turns,Achieve NOPAT Margin&,Capital Turns,Achieve Return on,Capital,Sales,670,895,670,895,670,895,670,895,670,895,NOPAT,(4,080),171,829,(4,080),171,829,98,516,Avg Capital,426,138,426,138,132,846,132,846,218,018,WACC,19.3%,19.3%,19.3%,19.3%,19.3%,EVA,(86,325),138,666,(29,720),146,190,56,438,The industry value-based strategy map indicates the markets approval of certain business strategies,
