【正文】 n Stewart ?A century ago, Alfred Marshall explained that for a pany to have genuine profits, the profits must be sufficient to cover the cost of capital as well as the firm?s operating costs ?Stern Stewart has repackaged the concept into EVA?, which is essentially a more palatable form of the same idea ?McKinsey has been using economic profit for many years ?BCG uses Cash Flow Return on Investment (CFROI) for a similar analysis ?To avoid infringing upon Stern Stewart?s trademark, many consulting firms have developed their own terms for the same concept How new is Economic Value Added? (EVA?)? EVATM is one variation of EP Background Economic Value Added 11 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Agenda ? Executive Summary ? Objectives ? Background ? Performance Measurement Framework ? Market Value Added (MVA) ? Economic Profit (EP) ? Cash Flow Return on Investment (CFROI) ? Exercises –MVA –Economic Profit ? Case Study Diageo 12 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Measures * For a discussion of WACC and discount rates, please see the Investment Appraisal Module in the BVU Description: EVA/MVA?,EP,and CFROI are modified accounting measures used to measure the performance of the business Inputs/ Measures: Fundamental Business Drivers Business Metrics Output Measures ?Primary businessspecific factors influencing shareholder value ?Tools used to measure performance of business ?Backwardlooking measures of overall pany performance as viewed by market ?Operating profits –volume –price –costs ?Financial Cost of Capital Employed –fixed assets –working capital –WACC* ?Accounting –ROE –ROA ?Modified accounting –EVA?/MVA? –EP –CFROI –CVA ?Total Shareholder Return (TSR) ?Total Business Return (TBR) Framework 13 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON The fundamental business drivers provide a framework for identifying the sources of shareholder value creation or destruction Shareholder Value Creation/Destruction Operating Profit Cost of Capital Volume Price Costs Working Capital WACC Fixed Assets X + X ?Direct costs –material –labour ?Indirect costs –SG A –Depreciation ?Average selling price ? of units sold ?Weighted average cost of capital based on market values of debt and equity ?Use aftertax cost of debt ?Current assets less current liabilities ?Property, plant equipment ?Intangibles ?LIFO vs FIFO ?Depreciation estimates ?Cost of equity for private firms ?Intangible measurement Components: Issues: Framework Fundamental Business Drivers 14 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON * Sometimes referred to as Return on Investment (ROI) ROE measures returns to shareholders, while ROA measures returns to investors of all forms of capital Formula: Measures: ROA Profitability of all capital employed, including debt Uses: Return on Assets (ROA)* Return on Equity (ROE) Net Ine Assets = ROE Net Ine Equity = Profitability of equity invested in business ( equity issued plus retained earnings) Returns of enterprise as a whole Returns to shareholders Framework Accounting Business Metrics 15 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON The DuPont formula is used to separate ROE into its ponents in order to assess the performance of the business ROE Net Ine Equity = Net Ine Sales = Sales Assets Assets Equity X X ROS Asset Turnover Leverage ROE = Profitability Asset Turnover Leverage X X = ROA Framework Accounting Business Metrics DuPont Formula 16 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON * EVA=EVA with depreciation added back Many consulting panies attempt to brand the modified accounting business metrics they use ?Economic Profit Measure Consulting Companies ?Bain ?McKinsey ?Marakon (through ValueBased Management) ?LEK ?EVA ? / MVA ? ?Stern Stewart ?AT Kearney ?Accounting firms ?BCG ?Holt ?BCG ?Cash Value Added* (CVA) ?Cash Flow Return on Investment (CFROI) Framework Modified Accounting Business Metrics 17 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON * only backward looking The modified accounting business metrics, which include EP, enable relatively accurate levels of corporate performance measurement at lower levels of decision making in the anisation Accuracy as Measure of Corporate Performance Level of Decision Making High Low Low High MVA? Modified Accounting Business Metrics TSR* ROE/ROA Fundamental Business Drivers EP/EVA?/CFROI Role in Organisation Framework 18 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON * Adjusted for all stock splits and assuming all dividends reinvested While TSR calculates return to shareholders for publiclylisted panies, BCG?s TBR calculation estimates equivalent returns for privatelyheld firms Total Shareholder Return (TSR) in CAGR Format Market value of share at end of period * Market value of share at beginning of period = Total Business Return (TBR) = Estimated market value of shares of privatelyheld pany at end of period* number of years 1 number of years 1 1 1 Estimated market value of shares of privatelyheld pany at beginning of period* Framework Output Measures 19 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Bain?s client stock performance slide is calculated using TSR, which is used to me