EVA vs. other performance measures

• Income statement variables: operating profit, earnings, net income
  • The investors are interested of what kind of resources (what amount of capital) are required to produce certain profit figure. A profit figure alone without capital base is irrelevant.
• ROI, RONA, ROCE etc. (Return on invested capital)
  • All accounting rates of return fail to steer the company correctly i.e. rate of return shouldnot be maximized: Consider a SBU producing ROI of 60%. The SBU faces an investement opportunity producing a return of 30%. Should the SBU undertake the project? How does the project influence the ROI of the SBU?
  • Capital costs into income statement:
    • When the costs of capital are shown in income statement operating people are able to see the importance of capital from the viewpoint of profitability. After realizing the true costs of capital operating people are often able to decrease excess employed capital considerable.
    • EVA is much more easy consept of profitability than ROI and furthermore it can be translated into day-to-day operations