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1、New York Chicago Los Angeles London Paris Milan Munich TokyoSao Paulo Singapore Sydney Johannesburg ShanghaiIntroduction to EVA Management System Contentsv What is EVA?v The calculation of EVAv The EVA management systemContentsv What is EVA?v The calculation of EVAv The EVA management systemEVA is E

2、arnings After the Cost of CapitalRevenues- Operating Costs- Depreciation-/+ Adjustments- Taxes= Operating Income After Tax (NOPAT) Capital x c% Capital Charge= EVAP/LB/SThe intrinsic value is the determinant of the market value in efficient capital market MVA, Stock price EVA ROI, Capital turnover,

3、margin Market share, Unit cost, scrap rate, delivery timeCompetitive strategyBusiness modelManagement systemOperating efficiencyUS 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

4、better than other measuresEVA measure gives 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 c

5、ontinue strong earnings performance.(in mil)Net IncEPSEVA(in mil)Contentsv What is EVA?v The calculation of EVAv The EVA management system 9From the traditional accounting model to the economic model of the firmAccountingFrameworkEVAFrameworkAdjustmentsP&LBalance SheetCash Flow StatementNOPATCap

6、italEVAv Separate financing effects from operating performancev Extend matching of costs with revenue to economic basis v Separate operating from non-operatingv Eliminate book keeping entries/reserves that distort cash flow and reduce objectivitySo as tov To better reflect value creationv To motivat

7、e the right value-creating behavior 10Optimizing the EVA Measurev MaterialityDifference in EVA with or without adjustment Is it material?Set a rule of thumb and use common sensev MotivationAdjustment must motivate managers to do the right thingStart with dysfunctional behaviors in standard operating

8、 proceduresv Data AvailabilityCost of collecting information must be reasonablev SimplicityEVA 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 toEco

9、nomicNon-operatingItemsNon-recurringEventsAccrual toCashAccounting 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(

10、Reserves)EVA seeks to emphasize actual cash eventsAccounting 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

11、Financing)In the EVA framework, we must turn the accounting 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 r

12、eturn byequity holders)Risk ()Risk-FreeRate RfMarket Risk PremiumMRP(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

13、 equity 16To calculate Beta, a list of peers need to be identified for Clientv 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 companies in similar industries and b

14、usiness environments.v 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 from which to measure the le

15、vered 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 identify value drivers.Co

16、ntentsv What is EVA?v The calculation of EVAv The EVA management system 18EVAEVAEVAEVAEVAEVA provides a comprehensive value management framework to translate strategy into action 19From EVA Goal Setting to Execution EPS Consensus Estimates Industry Data Benchmarking Internal forecasts Simulations of

17、 past historyClient Strategic Goals Consolidated EVA Growth GoalBusiness Unit EVA Growth GoalsOperating PlansCapital PlansResults/OutlookReportingEVA PlansReasonableness CheckMarket ExpectationsInternal ForecastsAccuracy CheckGoal setting is not an issue of the right number, but one of alignmentALIG

18、NMENT 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%NOPATCapitalProfitMarginCapitalTurnoverXNOPATSalesSalesCapitalXorDissecting 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 understand and map out its strategy to i

26、mprove returnsROC 4%A: ROC 15%BROC 15%0.0%10.0%20.0%30.0%0.0 x0.5x1.0 x1.5x2.0 x2.5x3.0 x3.5x4.0 xSales per dollar of CapitalNopat per dollar of SalesROC 20%ROC 5%ROC 10% 27Client 1999Client 2000Client peers use fundamentally different business strategies to create value in the industry 28Total Oper

27、ation Expense Margin0%20%40%60%80%100%120%BaltransEGLExped.Client 1999Client 2000AirborneAtlasCNFFedexUPSAverage% of SalesNOPAT 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.Cl

28、ient 1999Client 2000AirborneAtlasFedexUPSAverage% of SalesFixed Expenses Margin0%10%20%30%40%50%60%70%80%90%EGLExped.Client 1999Client 2000AirborneAtlasFedexUPSAverage% of SalesBenchmarking NOPAT margins give Client a sense of how it falls in terms of operating efficiencyNote: Baltrans and CNF remov

29、ed from Variable and Fixed Expense drivers analysis due to insufficient data 29Capital Charge Margin0%5%10%15%20%25%30%35%40%BaltransEGLExped.Client 1999Client 2000AirborneAtlasCNFFedexUPSAverage% of SalesNWC Capital Charge Margin0%1%2%3%4%5%6%7%BaltransEGLExped.Client 1999Client 2000AirborneAtlasCN

30、FFedexUPSAverage% of SalesFixed Assets Charge Margin0%5%10%15%20%25%BaltransEGLExped.Client 1999Client 2000AirborneAtlasCNFFedexUPSAverage% of SalesOther Capital Charge Margin-2%0%2%4%6%8%10%12%BaltransEGLExped.Client 1999Client 2000AirborneAtlasCNFFedexUPSAverage% of SalesCapital benchmarking point

31、s to working capital and fixed assets as an opportunity for Client to drive EVA upwards 30Summary of Benchmarking study 1999 Data In Thousands of USD Company / ItemsBaltransEGLExped. Client 1999Client 2000 AirborneAtlasCNFFedexUPSAverageBest in ClassSales100%100%100%100%100%100%100%100%100%100%100%1

32、00%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 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

33、%= 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%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

34、,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(361,190)(261,400) 31Aboitiz Air0.0 x1.0 x2.0 x3.0 x4.0 x5.0 x6.0 x7.0 x8.0 x9.0 x10.0 x-5%0%5%10%15%20%25%30%NOPAT MarginCapital TurnoverROC 130%ROC 45%ROC 26%Looking at best in c

35、lass 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 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% 32Clie