Reason 2: EVA is more practical and understandable than rate of return (ROI...) (2/4)

• Thus in ROI-steered companies the capital base is left to very little attention in operating activities and operating profit is emphasized

• Therefore the meaning of capital efficiency is often forgotten and some operating people do not even realize that tying money in inventories or sales receivables is costly
  • I have heard comments that inventories are not very costly because short interest rates are only 3% per annum...

• EVA, in contrast to ROI, is as an absolute measure easy to integrate into operating activities since all cost reductions and revenue increases are already in terms of EVA (reduction in costs in one period = increase in EVA in the same period). In the similar fashion capital increases /reductions are also fairly easy to turn into change of EVA

• Furthermore EVA is (in contrast to ROI) an unambigious measure i.e. increasing EVA increases always the positition of shareholders