What gets measured gets done for better or worse. Too many companies chase growth in earnings per share, only to find themselves employing too much capital at too low a rate of return and thereby eroding shareholder value. Economic Value Added(1) offers a beguiling solution: an easy-to-understand measure that recognizes improvements in earnings only to the extent that they exceed the cost of the capital employed to secure them.
Eminently sensible, but for one critical flaw: EVA discourages growth. The conceptual problems have been there all along; the empirical evidence is beginning to mount. At a time when renewing growth represents the major competitive challenge facing most companies, dependence on EVA can become a major obstacle to building shareholder value. Fortunately, there are better alternatives.
Author: Eric E. Olsen
Source: Boston Consulting Group (BCG)
Subjects: Finance, Management