Study On EVA And The Value Of Companies: Correlations And Applications In Value Management

With the transition of business management philosophy, the maximization ofshareholders’ wealth has become the operating goal of modern companies. Whilst thetraditional accounting-profit based measuring and management system is exposing itsdrawbacks day after day of unable to satisfy the wealth maximization goal. One of themajor problems is the negligence of equity cost in the traditional system. Seeminglyprofitable company could be deteriorating investor’s value if equity cost is to beincluded, and this is even more importance for companies with higher equity value.One of the preeminent advantages of EVA over traditional accounting profit is thecomplete consideration of equity cost, which makes the EVA ratio more like aneconomic profit metric and more scientific.This dissertation first introduces basic EVA theories after which a comprehensiveliterature review is presented. In the core chapter, we discussed the correlationbetween EVA and the value of firms in the recent context of Chinese capital markets.We have reached, according to the defined method of calculating EVA, a conclusionthat a relatively high correlation does exist in Chinese capital markets. However, thecorrelation is not as strong as EPS, another important value indicator. The resultscould mean that EPS is still one of the most factors that investors consider when theychoose where to invest their money, and of course this viewpoint is still improvable.Under the support of the empirical conclusions, we further more focused ourattention on looking at EVA as a whole management system and its integration withthe popular management theory-the value based management, which providesapplication insights.