Economic Value Added

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.

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