Economic Value Added/Economic Profit

Stern Stewart built on Residual Income research of Modigliano and Miller to bring us concept of Economic Value Added. Economic Value Added takes Cash Flow Analysis one step further by incorporating the concept of the cost of capital.

Economic Profit is a synonym for Economic Value. Economic Value is a better formula to show the change in Economic Value from one period to the next.

The basis economic value added formula is

NO PAT (Net Operating Profit After Tax)
- Cost of Capital
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Economic Value Added

Shareholder Value/Market Value Analysis

Market Value is simply the shareholder value at a single point in time. It is calculated by multiply the number of shares by the market price per share. It is a better formula for determining the current value of an organization.

Goal of Both Techniques

Goal of both techniques is to increase company's shareholder value.

Benefits From Process Improvement, Not From These Measurements

These measurement help with focus. Basing compensation on these measurement supports this focus. However, having these measurements is not enough. The organization must improve its processes. Simply telling managers these are the new goals is a great start. However, the managers must be taught and must use various process improvement techniques such as Six Sigma, Activity Based Management, Process Management, and Redesign to actually achieve the higher measurement.

Call Richard Malekian at 972-980-7407 to find out how Economic Value Added can help you reach your goals.