EVA vs. rate of return

• There are two very good reasons why EVA is much better than ROI (RONA, ROCE, ROIC) as a controlling tool and as a performance measure

• 1. Steering failure in ROI
  • Increase in ROI is not necessarily good for shareholders i.e. maximizing ROI can not be set as a target. (Increase in ROI would be unambiguously good only in the companies where capital can be neither increased nor decreased -> [an error occurred while processing this directive]

• 2. EVA is more practical and understandable than ROI
  • As an absolute and income statement -based measure EVA is quite easily explained to non-financial employees and furthermore the impacts of different day-to-day actions can be easily turned into EVA-figures since an additional $100 cost decreases EVA with $100. (ROI is neither easy to explain to employees nor can day-to-day actions easily be expressed in terms of ROI)
  • This latter benefit if often totally forgotten in academic discussion since it can not, of course, be visible in desk studies or empirical studies which try to trace the correlation of EVA and share prices

• Both points are explained in detail in the following slides

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