Toward Better Measurement of Financial Performance: A Robust OEVA-TEVA Alternative to Biased EVA

Russian Management Journal, 17(2), 2019

Posted: 9 Aug 2019

See all articles by Rauf Ibragimov

Rauf Ibragimov

Russian Presidential Academy of National Economy and Public Administration

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Date Written: June 28, 2019

Abstract

We demonstrate analytically and illustrate with examples that the conventional measures of the residual operating income such as the Economic Value Added (EVA) are biased by design and so may yield a misleading assessment of financial performance. Fundamentally, the magnitude of the measurement error depends on the amount of realized interest tax shields and the book to value ratio. Other potentially significant sources of distortions induced by the EVA design are identified as well. We propose a robust alternative that is a concurrent evaluation of the firm’s operating and total performance by means of two related metrics, the Operating EVA (OEVA) and the Total EVA (TEVA). Coherent implementation of the OEVA–TEVA technique is simpler than the EVA both analytically and computationally. It is also able to provide additional information for the management decision making. The overall consistency of the OEVA–TEVA approach is supported by a formally proved equivalence of the corresponding OEVA–TEVA valuation model to the fundamental valuation by the cash flow discounting.

Keywords: financial performance measurement, operating EVA, total EVA, economic value added, market value added, valuation

JEL Classification: G32, G39, M21, M41

Suggested Citation

Ibragimov, Rauf and Velez-Pareja, Ignacio, Toward Better Measurement of Financial Performance: A Robust OEVA-TEVA Alternative to Biased EVA (June 28, 2019). Russian Management Journal, 17(2), 2019. Available at SSRN: https://ssrn.com/abstract=3433067

Rauf Ibragimov (Contact Author)

Russian Presidential Academy of National Economy and Public Administration ( email )

Vernadskogo Avenue,82
Moscow, Moscow region 119571
Russia
007 495 4347103 (Phone)
007 495 4349027 (Fax)

HOME PAGE: http://www.ranepa.ru/eng/

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Ave Miramar # 18-93 Apt 6A
Cartagena
Colombia
+573112333074 (Phone)

HOME PAGE: http://cashflow88.com/decisiones/decisiones.html

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