Proceedings of 6th Annual American Business Research Conference
9 - 10 June 2014, Sheraton LaGuardia East Hotel, New York, USA, ISBN: 978-1-922069-52-8
Eva As A Measurement Tool of Financial Performance: A Casestudy
of An It Firm.
*M. Ravindar Reddy and **Merugu Venugopal
Creating Shareholder value is becoming the new corporate goal in India. Shareholder’s value is
measured in terms of the return they receive on their investment. For measuring shareholder value
economic value-based models are used. EVA is a tool that helps corporate leaders in creating
shareholder value through cost structure development. EVA is considered as a superior measure of
shareholder value as compared to traditional accounting measures like return on capital employed
(ROCE), Return on Net Worth (RONW), earnings per share (EPS) etc. because value based
methods consider the cost of capital in the calculation of financial performance. Therefore, an
attempt has been made in this study to calculate the EVA of Tata Consultancy Services Pvt Ltd
(TCS), one of the leading IT services companies in India, to conclude whether the company has
created wealth to the shareholders during 2004-05 to 2013-14. An attempt has also been made to
show the extent to which traditional accounting measures differ from the perspective of EVA. The
results of the study reveal that TCS has added value to the shareholders during the study period
and it is the EVA depicts the real financial and economic performance of the company over
traditional measures.
Keywords: Economic value added, Shareholder value, Traditional Accounting measures.
Field of Research: Finance
Introduction:
In Indian corporations the goal is changing towards shareholder value creation from profit
maximization. There are a few reasons for this, like shift in the capital markets to global, the real
owners are demanding accountability from corporate executives and etc. value is created only
when revenues exceeds all expenses. Expenses mainly come from raw material purchases,
supplies, various costs using the capital, employee wages and benefits and corporate taxes. The
value will be delivered to shareholders because they are the real owners of the firm.
The shareholder value view started gaining significant support during the 1980‟s and 1990‟s and is
today considered the most important corporate objective (Shukla 2009; Sakthivel, 2011). Todays
corporate managers must goal is to maximize the shareholder value by efficient allocation of
resources of the organization. Shareholder value management has for many years been a
dominating management concept and a performance indicator for companies all over the world
(Copeland, Koller & Murrin 1991). According to (Jensen 2001) shareholder value maximization is
the only objective that makes sense since it involves maximizing only one measure. (Kay 2010)
claims that a key deficiency of shareholder value management is the fact that it causes managers
_______________________________________________________________________________
*Associate Professor, Head, School of Management, National Institute of Technology, Warangal.
Email: mrrncc@gmail.com, head_som@nitw.ac.in. Contact Number: +91 9490165349, +91 9849552879
**Doctoral Student, School of Management, National Institute of Technology, Warangal.
Email: vgmerugu@gmail.com, Contact Number: +91 9959260114
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Proceedings of 6th Annual American Business Research Conference
9 - 10 June 2014, Sheraton LaGuardia East Hotel, New York, USA, ISBN: 978-1-922069-52-8
only to focus on the next earnings announcement and the value is determined by the long
run(Koller, Goedhart & Wessels 2010).
To measure shareholder value, there exist various traditional and modern measures, among them
Economic Value Added (EVA) is a tool for corporate governance (Baginski et al., 2003). It is an
alternate performance measurement technique which is used to overcome the limitation of
traditional measures include Return on Investment (ROI), Return on Equity (ROE), Earnings per
Share (EPS), Return on Capital Employed (ROCE) and etc (Epstein, 1930; Sloan 1929). It is a
ballpark figure of a firm‟s economic profit. It measures the value addition to the corporation.
EVA was developed by stern Stewart (1990) has merged as a way to measure financial
performance of various corporations like coca-cola, IBM, P&G, Microsoft, AT&T and Indian
companies such as Infosys, BPL, TCS and etc. have adopted EVA. According to CFO magazine
(Oct 1996) 25 companies have used EVA in 1993 and 250 in 1996. The advantage of EVA, over
earnings is that they take into account the capital used to obtain the earnings and its risk.
ABOUT TATA CONSULTANCY SERVICES PVT LTD.:
Tata Consultancy Pvt Ltd was incorporated in the year 1968 to provide management consulting
services apart from other business units. TCS is an information Technology (IT) company, which
serves a range of IT services, outsourcing and business solutions throughout the globe. TCS has
grown to its current position as the largest IT services firm in Asia based on its record of outstanding
services, collaborations, partnership with foreign companies, innovation and corporate
responsibility.s
OBJECTIVES OF THE STUDY:
(i)
(ii)
(iii)
To compute EVA for Tata Consultancy services Ltd (TCS).
To evaluate whether the TCS has added value to the shareholders during 2004-05 to
2013-14.
To compare EVA with other measures.
RESEARCH METHODOLOGY:
The present study is mainly based on secondary data. To analyze trends and growth of value
creation in terms of EVA of TCS Ltd. And to analyze the relationship between EVA and other
measures, required financial data is collected from “Cappitaline Plus” Database of Capital Market
Publishers India (Pvt) Ltd. The period of the present research work begins from 2003-04 to 2013-14.
It had been assumed that 10 years India government bond yield, i.e. 8.81 % where the risk free rate
of return in this study. To calculate beta, it had been considered BSE SENSEX index return and
TCS Ltd share price return. Similarly the risk free rate of market is calculated using the BSE
SENSEX value during the considered period.
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Proceedings of 6th Annual American Business Research Conference
9 - 10 June 2014, Sheraton LaGuardia East Hotel, New York, USA, ISBN: 978-1-922069-52-8
EVA CALCULATION:
According to the stern Stewart and Co‟s definition, page 192 of their book “the quest for value. The
EVA management guide”, Harper Business 1991. EVA is simply the Earning before interest (also
called as NOPAT) less the firm‟s book value (Debt + Equity) multiplied by the weighted average
cost of capital (WACC).
(i)
EVA = Earnings before interest and after taxes – (Frim‟s book value * Average cost of
capital).
(ii)
NOPAT (Net Operating Profit after taxes) Is the profit of the unlevered (debt – free) firm.
Sometimes it Is also called EBIAT (Earnings before interest and after taxes).
(
) Where t= tax rate.
(iii)
The product of a firm‟s book value and average cost of capital is called as Cost of Capital
Employed (COCE).
(iv)
(v)
(vi)
Where
are weights of individual sources (debt and equity) in the capital
structure,
= Cost of Debt,
= Cost of Equity.
(
)
Cost of debt
Where I = interest rate, t = tax rate
Cost of equity (Using Capital Asset Pricing Model)
(
)
Where
= Risk free rate,
Expected market return, = Volatality of the Market.
RESULTS AND DISCUSSION:
In Table 1, Calculation of EVA of Tata Consultancy Services Pvt Ltd with the methodology adopted
had been out in the open. The result showed that TCS had added value to the shareholders during
the study period except 2006 and 2010. During these financial years TCS cost capital is excess to
the profits it earned. The capacity to create value consistently shows the ability of the firms in
earning operating profits adjusted for the tax in excess of the cost of capital.
TCS had added wealth to the shareholders during the study period, which discovered the
shareholders' funds were engaged into productive way to create profits to the company and
shareholders.
The overall performance is very good as the EVA for the years are positive except few years and is
in the increasing trend. The challenge is to maintain the EVA positive by controlling the cost of
capital and other expenses, which the firm has been succeeded to do over the past 3 years.
In Table 2, an attempt had been made to compare EVA with other traditional methods of evaluating
financial performance, namely ROCE, RONW, PAT, EPS and Market Capitalization. During the
study period, TCS depicted Ups and Downs of ROCE. Since 2009 ROCE of TCS is increasing from
38.67% to 60.13% in 2014. The high percentage of ROCE shows that TCS is efficiently investing
the long term funds of owners and lenders to reap the maximum return. The RONW (also called as
ROE) values showed fluctuating trend during the study period. It reflects that TCS is able to provide
the equity investors with better returns per rupee of their investments. In determining a share‟s
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Proceedings of 6th Annual American Business Research Conference
9 - 10 June 2014, Sheraton LaGuardia East Hotel, New York, USA, ISBN: 978-1-922069-52-8
price Earnings per share(EPS) is to be considered as an important variable. In general, higher the
EPS, better it is and vice versa. In table 2, TCS has shown a continued growth in the EPS since
2005, this shows TCS will ensure the best returns for the investment put on it. Market capitalization
allows investors to understand the relative size of the company versus another company not worth.
During the study period, the rate of growth of market capitalization is fluctuating moderately. There
is a misconception that a higher stock price indicates a larger company. However, the stock price
misrepresents the actual worth of a company. The company is classified based on the market
capitalization and will allow investors to determine the growth and risk potential of an individual.
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Proceedings of 6th Annual American Business Research Conference
9 - 10 June 2014, Sheraton LaGuardia East Hotel, New York, USA, ISBN: 978-1-922069-52-8
Year
Capital
Employed
Cost of Equity
Cost of Debt
Weighted
average
Cost of Capital
COCE
NOPAT
2014
2013
2012
2006
2005
45137.41 33255.58 25313.20 19826.72 15152.39 13487.34 11023.11 8109.73
0.12
0.09
-0.08
0.10
0.45
-0.38
0.11
0.08
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
5644.83
0.78
0.00
3441.79
0.21
0.00
0.12
0.09
-0.08
5344.93
2881.39 -1972.11
19317.96 13511.36 11513.57
0.10
2067.64
8087.61
0.45
6786.74
5920.00
-0.38
-5093.87
5157.95
0.12
1270.18
4984.90
0.08
688.74
4076.85
0.22
744.79
1998.41
EVA
13973.03 10629.97 13485.68
Table 1. EVA Trends: 2004-05 to 2013-14.
6019.97
-866.74
10251.82
3714.73
3388.11
0.78
4423.92
2986.35
1437.57
Table 2. EVA and Conventional measures
2014
2013
10629.9
EVA
13973.03
7
48426.9
Sales
64676.08
6
307632.
Market capitalization
416860.33
7
EPS (annualised) (Unit Curr)
90.15
61.59
Rate of Growth (%)
ROG-PAT (%)
44.49
16.49
ROG-Market Capitalisation
(%)
35.51
34.59
Key Ratios
ROCE (%)
60.13
53.73
RONW (%)
48.22
44.63
2011
2010
2009
2012
13485.6
8
38104.4
8
228571.
6
51.89
2011
2010
6019.97
29275.6
8
231438.
9
36.32
-866.74
23044.84
152818.1
8
25.26
44.99
34.73
-1.24
59.29
49.53
2008
2009
10251.8
2
22406.0
8
2007
2008
2007
3388.11
52844.4
45.53
3714.73
18292.6
8
79354.6
7
43.69
19.64
4.16
51.45
189.19
49.86
43.83
44.55
39.5
1253.63
14942.09
120485.2
3
36.66
2006
1437.57
11236.0
1
93659.3
6
53.63
2005
68786.33
36.6
20
38.29
48.35
64.69
-33.41
-34.14
28.64
36.16
0
42
38.67
52.34
47.55
60.69
54.98
67.77
60.85
109.87
108.75
1253.63
8051.11
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Proceedings of 6th Annual American Business Research Conference
9 - 10 June 2014, Sheraton LaGuardia East Hotel, New York, USA, ISBN: 978-1-922069-52-8
CONCLUSION:
Tata Consultancy Service Pvt Ltd. Has taken all the essential steps to make sure efficient use of
investing funds from various sources by taking as a top priority to increase value of shareholders.
TCS has added value to the shareholders during the study period. EVA should be disclosed to the
investors or shareholders, which would contribute in attracting new investors and equity will be
increased by avoiding the debt. Traditional methods ROCE, RONW, EPS, PAT and Market
Capitalization are not perfect enough to reflect the real financial performance. Therefore value added
methods like EVA is required to measure the economic profit that is the best in measuring
managerial efficiency. EVA better represents the market value of TCS in comparison to conventional
performance methods. It is felt that further research is needed on implementation issues, role of
accounting adjustments and EVA as a strategy. Therefore, efforts should be made in the direction of
value creation and measurement methods to make shareholders as a major concern for
organizations like TCS in developing economies.
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Proceedings of 6th Annual American Business Research Conference
9 - 10 June 2014, Sheraton LaGuardia East Hotel, New York, USA, ISBN: 978-1-922069-52-8
Shil NC. 2009. Performance measures: an application of economic value added. International
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