Tag: Calculation

An introduction to order of operations: Definition, Rules, and Examples
How Can an Order of Operations Calculator Help You? The order of operations is widely used in mathematics to calculate the problems of math expression perfectly. This form allows using of a sequence of mathematical symbols such as multiply, divide, addition, & subtraction.

Here are the articles to explain, An introduction to Order of Operations Calculator: Definition, Rules, and Examples

It is usually used all over the world to get a similar result by applying the correct sequence of operations in math expression problems. In this article, we will cover all the general basics of the order of operations calculator along with solved examples.

An introduction to Order of Operations Calculator: Definition, Rules, and Examples

What is the order of operations?

In mathematics, the order that is used to solve the mathematical expression correctly is known as the order of operations. Also, It provides a sequence of operations that are applied to the math expressions to get the correct result.

The following are two well-known techniques of the order of operations that are frequently used all over the world.
1. PEMDAS Rule
2. BODMAS Rule
In western countries (United States, United Kingdom, Canada, etc.), the PEMDAS rule is used to solve math expression problems. While in Asian countries (India, Pakistan, Sri Lanka, etc.), the BODMAS rule is used.

Techniques of the order of operations

Here is a brief introduction to both techniques of the order of operations.

(i) PEMDAS Rule

The PEMDAS rule is widely used in western and European countries for solving the expressions of mathematics in a perfect sequence. The PEMDAS stands for:
- P for Parentheses “( )”
- E for Exponent “^”
- M for Multiplication “* or x”
- D for Division “/”
- A for Addition “+”
- S for Subtraction “-”
(ii) BODMAS Rule

The BODMAS rule is widely used in Asian countries for solving the expressions of mathematics in a perfect sequence. The BODMAS stands for:
- B for Brackets (brackets can be braces or parenthesis)
- O for Order of (exponent “^”)
- D for Division “/”
- M for Multiplication “* or x”,
- A for Addition “+”
- S for Subtraction “-”.
How to calculate the order of operations?

The problems of the math expression can be solved easily with the help of the PEMDAS and the BODMAS rules. Below are a few steps to solve the problems of PEMDAS and the BODMAS rules.
1. Firstly, evaluate the parenthesis, brackets, and braces that are present in the given math expression. Evaluate the leftmost parenthesis or braces first if there is more than one parenthesis or braces.
2. After that evaluate the power, exponent, or order of the terms that are present in the math expression. Evaluate the leftmost exponent or order term first if there is more than one exponent or order.
3. Then evaluate the division and multiplication terms of the math expression from left to right.
4. Lastly, evaluate the addition and subtraction operations from left to right.
Following are a few examples of the order of operations.

Example 1: By the PEMDAS rule

Evaluate 6³ + (112 – 8) * 4⁴ – 40/8 + (43 + 17) – 2 (16 * 4) – 8 by using the PEMDAS rule.

Solution

Step I: Firstly, write the given math expression.

6³ + (112 – 8) * 4⁴ – 40/8 + (43 + 17) – 2 (16 * 4) – 8

Step II: Evaluate the parenthesis that is present in the above math expression.

6³ + (104) * 4⁴ – 40/8 + (43 + 17) – 2 (16 * 4) – 8

6³ + 104 * 4⁴ – 40/8 + (60) – 2 (16 * 4) – 8

Also, 6³ + 104 * 4⁴ – 40/8 + 60 – 2 (64) – 8

6³ + 104 * 4⁴ – 40/8 + 60 – 128 – 8

Step III: Now evaluate the exponent terms present in the given math expression.

(6 x 6 x 6) + 104 * 4⁴ – 40/8 + 60 – 128 – 8

216 + 104 * 4⁴ – 40/8 + 60 – 128 – 8

216 + 104 * (4 x 4 x 4 x 4) – 40/8 + 60 – 128 – 8

Also, 216 + 104 * 256 – 40/8 + 60 – 128 – 8

Step IV: Now solve the multiplication and division terms from left to right.

216 + 104 * 256 – 40/8 + 60 – 128 – 8

216 + 26624 – 40/8 + 60 – 128 – 8

Also, 216 + 26624 – 5 + 60 – 128 – 8

Step V: Solve the addition and subtraction terms from left to right.

26840 – 5 + 60 – 128 – 8

26835 + 60 – 128 – 8

26895 – 128 – 8

26767 – 8

26759

Step VI: Write the given math expression with the result.

6³ + (112 – 8) * 4⁴ – 40/8 + (43 + 17) – 2 (16 * 4) – 8 = 26759

To avoid such a large number of steps to solve the math expression, use a PEMDAS calculator.

PEMDAS Calculator

Follow the steps below to solve math expressions using a calculator.

Step i: Write the given math expression into the required input field.

Step ii: Click the calculate button below the input field.

Also, Step iii: The result will show in a fraction of a second with steps.

Step iv: Hit the show more button to view the solution with steps.

Example 2: By the BODMAS rule

Solve 12 – (7 + 11) * 6 + 9³ – 40/5 – (60 * 3 + 12) + 5 (2 * 14) / 4⁴ by using the BODMAS rule.

Solution

Step I: Firstly, write the given math expression.

12 – (7 + 11) * 6 + 9³ – 40/5 – (60 * 3 + 12) + 5 (2 * 14) / 4⁴

Step II: Evaluate the parenthesis present in the given math expression.

12 – (7 + 11) * 6 + 9³ – 40/5 – (60 * 3 + 12) + 5 (2 * 14) / 4⁴

12 – (18) * 6 + 9³ – 40/5 – (60 * 3 + 12) + 5 (2 * 14) / 4⁴

Also, 12 – 18 * 6 + 9³ – 40/5 – (180 + 12) + 5 (2 * 14) / 4⁴

12 – 18 * 6 + 9³ – 40/5 – (192) + 5 (2 * 14) / 4⁴

12 – 18 * 6 + 9³ – 40/5 – 192 + 5 (28) / 4⁴

Maybe, 12 – 18 * 6 + 9³ – 40/5 – 192 + 140 / 4⁴

Step III: Now solve the exponent terms present in the given math expression.

12 – 18 * 6 + 9³ – 40/5 – 192 + 140 / 4⁴

12 – 18 * 6 + (9 x 9 x 9) – 40/5 – 192 + 140 / 4⁴

Also, 12 – 18 * 6 + (729) – 40/5 – 192 + 140 / (4 x 4 x 4 x 4)

12 – 18 * 6 + 729 – 40/5 – 192 + 140 / 256

Step IV: Now solve the division and multiplication terms from left to right.

12 – 18 * 6 + 729 – 40/5 – 192 + 140 / 256

12 – 108 + 729 – 40/5 – 192 + 140 / 256

Also, 12 – 108+ 729 – 8 – 192 + 140 / 256

12 – 108+ 729 – 8 – 192 + 0.55

Step V: Solve the addition and subtraction terms from left to right.

12 – 108+ 729 – 8 – 192 + 0.55

-96 + 729 – 8 – 192 + 0.55

633 – 8 – 192 + 0.55

625 – 192 + 0.55

433 + 0.55

433.55

Step VI: Write the given math expression with the result.

12 – (7 + 11) * 6 + 9³ – 40/5 – (60 * 3 + 12) + 5 (2 * 14) / 4⁴ = 433.55

Conclusion

Now you are witnessed that solving the problems of math expression by using the PEMDAS and BODMAS is not a difficult task, as well as the order of operations calculator. You have to follow the sequence of operations to get the correct result.
March 11, 2023
Operating margin Vs Gross margin calculation
Operating margin Vs Gross margin measures a company’s profitability by calculating the ratio of operating income to net sales. It is also known as operating income margin, operating margin, earnings before interest and taxes (EBIT) margin, or return on sales (ROS). Businesses calculate operating margins by deducting the cost of goods sold (COGS), operating, depreciation, and amortization costs from net sales. Accounting software calculates and analyzes operating profit margins to help businesses visualize real-time revenue for every dollar of sales revenue.

What is the Operating margin Vs Gross margin? Importance and calculation formula

Operating profit = operating income – operating costs – taxes and surcharges – sales expenses – management expenses – financial expenses – asset impairment losses – credit impairment losses + gains from changes in fair value (-losses from changes in fair value) + investment income (-losses on investments ) + income from asset disposal (- loss from asset disposal) + other income

Operating profit ratio = (operating profit/operating income) × 100%. The operating profit ratio indicates the ability of the enterprise to obtain profits through production and operation. The higher the ratio, the stronger the profitability of the enterprise.

Extended information:

In addition to being affected by the income from sales of goods, the operating profit is also affected by the price difference between the purchase and sale of goods sold, tax on goods sales, variable expenses of goods sales, and fixed expenses that should be borne by goods sales. The impact of these factors on the profit of commodity sales can be expressed in the following way.

The Importance of Operating Margins

A company’s operating margin indicates the profitability of the core business and enables stakeholders to assess an organization’s ability to pay fixed costs such as interest and taxes. Operating margins are also critical for businesses looking to optimize resource allocation based on revenue forecasts.

How are stakeholders using operating profits to make decisions?
- Investors: Identify growing or shrinking profit and spending patterns
- Analysts: Assess stock value, and a company’s ability to pay for equity and debt investments
- Senior Leadership Team (SLT): Benchmarking the Competition with Operating Margin
- Managers: Gain insight into variable costs and decision effectiveness
Operating Margin Formula

The operating margin formula helps companies measure the overall business health and profitability of their core business. Business managers consider operating margin in conjunction with free cash flow, net profit, and gross profit.

Operating profit margin = (operating income – net sales income) X 100%

Operating income is the profit a business makes after deducting various expenses. Such as the cost of goods sold, general and administrative (G&A) expenses, depreciation, marketing, research and development, and other operating costs. Operating income helps a business determine net income before interest and taxes for a specific period. Net sales revenue is gross revenue or gross sales minus sales returns, discounts, and allowances. Net sales figures appear under direct costs on the income statement and are critical to an organization’s revenue growth.

What is a good operating margin?

Operating margins vary across industries due to varying levels of competition, efficiencies of scale, and capital structures. Operating efficiencies vary across industries, as do operating margins. That’s why it’s unfair to compare two different industries. Excellent operating margins that increase over time while remaining positive. Companies striving to achieve superior operating profit must improve unit economics and remain competitive and relevant.

What does gross margin mean?

The gross profit margin is an important indicator to measure the profitability of a company. Usually, the higher the gross profit margin, the higher the profitability of the enterprise and the stronger the ability to control costs.

This also reminds us that when choosing stocks, we can pay attention to the company’s gross profit margin. Companies in the same industry, when other indicators are close, choose companies with high gross profit margins as much as possible, and the probability of choosing a good company will be higher.

Gross profit margin refers to the proportion of how much money can be used for the next period after deducting the cost of sales from each yuan of sales revenue. The ratio of gross profit to merchandise sales revenue. Usually expressed as a percentage. It can be calculated by one commodity, or comprehensively by commodity category.

Refers to the percentage of gross profit in sales revenue, also referred to as gross profit margin, where gross profit is the difference between sales revenue and sales cost.

Calculation formula:

Calculation formula: gross profit margin = (operating income – operating cost) / operating income * 100%

Sales gross profit margin = sales gross profit / sales revenue × 100% = (sales revenue – sales cost) / sales revenue × 100%

The gross profit margin is an important indicator to measure the profitability of a company. Usually, the highest gross profit margin indicates that the higher the profitability of the enterprise, the stronger the ability to control costs.

How to Improve Operating Margins

A healthy operating margin is critical to financial stability. Companies with higher operating margins are less likely to be exposed to risk and will constantly seek to improve margins. These organizations use the following practices to increase their operating margins.
- Analysis category fees. Companies can improve operating margins by identifying key expenses from the business expense ledger and aligning these expenses with gross revenue.
- Create economies of scale. Identifying process integration opportunities is another great way to improve profits. This integration requires careful evaluation, analysis, and transformation of existing processes so that new processes generate more revenue.
- The pruning operation is wasteful. Conducting regular audits helps companies identify lengthy production processes and control the use of raw materials. Minimizing operational lag through the synchronization of production processes is key to improving the efficiency of business operations.
Operating Margin vs Gross Margin vs Net Margin

Operating margin evaluates operating efficiency by finding the company’s profit after variable costs are paid for. The metric does not take interest or taxes into account. Businesses looking to improve operating profits use resources efficiently, set product prices, and improve management controls.

Gross margin is the ratio of gross profit to total revenue. Gross margin analysis is an effective way to understand production efficiency and gross profit per dollar of revenue. Product-based companies regularly analyze gross margins to see improvements or declines in product margins over time. Net profit margin measures net income or profit per dollar of revenue. This metric is an excellent benchmark for evaluating a company’s ability to generate profits from sales, including overhead and operating costs.

What is the difference between gross profit margin and net profit margin?

Nature is different:

The gross profit rate is the ratio of the company’s gross income after removing the direct cost of the product (without removing the three fees and other costs such as income tax), so it is called the gross profit rate. The net interest rate is also the higher the long-term growth, the better. If the growth of net profit is faster than the growth of revenue, the net profit rate will increase, indicating that the company’s profitability is increasing; otherwise, it indicates that the company’s profitability may be declining.

Different meanings:

A high gross profit margin indicates that the company’s products are highly competitive in the market, which means that consumers are willing to pay a higher price than similar products to buy the company’s products. The net profit rate is also a good static indicator for assessing the management ability of the company management because only good management can gradually reduce the company’s three expenses, thereby saving more profits for the company and shareholders.

Different calculation methods:

Gross profit margin = gross profit / operating income × 100% = (main business income – main business cost) / main business income × 100%, net profit rate = net profit / main business income × 100% = (Total profit – income tax expenses) / main business income × 100%.

Operating margin Vs Gross margin calculation; Photo by PiggyBank on Unsplash.
January 23, 2023
Stock Trading: How to trade for profits in the stock market?
Stock Trading – How to trade for profits in the stock market? In the complex jargon of trading terminology, not everybody who buys and sells stocks is a stock trader. Top stock trading platforms in the UK, USA, India, and others; Many people fall into one of two categories based on how much they purchase and sell stocks: traders or buyers.

Here is the article to explain, What is Stock Trading? with understand How to trade for profits in the stock market?

The trader portrays as a frantic Wall Streeter, glued to computers and flashing tickers, buying and selling all day. On the other hand, investors usually buy at regular intervals and sell even less regularly, at least before retirement.

Stock trading isn’t necessarily what you see on the New York or London Stock Exchange floor. You can start from your own house. But before you make your first trade, you should know what you’re doing.

What exactly is stock trading?

Stock traders purchase and sell securities and stocks to profit from regular market swings. Instead of buying shares in a firm to keep for years or even decades, these short-term traders gamble that they will earn a million dollars in the next month, day, minute, or second.

Stock trading is classified into two types:

Day Trading.

Day trading is a technique used by capitalists who deal with stocks on daily basis. Purchasing, selling, and closing positions in the same stock in a single trading day, with no regard for the underlying firms.

Position applies to how much of a certain portfolio or fund you own. The aim of a day trader is to profit from frequent market changes over the next few days, hours, or minutes.

Active Trading.

A trader who makes 10 or more trades a month considers being an active trader. Typically, they use a tactic that strongly depends on market positioning, attempting to benefit from short-term developments at the business level or depending on market fluctuations in the coming weeks or months.

Trading Stocks – How, Why, and When?

If you’re new to stock trading, bear in mind that most investors benefit from keeping it straightforward and investing in a diversified blend of low-cost index funds to generate.

Here is all you should know about stock trading.

Get an account for brokerage.

Stock trading necessitates the financing of a brokerage account, which is a form of account intended to deposit funds. If you don’t already have an account, you can open one in a matter of minutes with an online broker. But don’t worry, just because you’ve opened an account doesn’t mean you’ve started saving. It simply gives you the choice to do so when you are ready.

Define a budget for trading.

Even if you develop a knack for stock investing, allocating more than 10% of your portfolio to individual securities will subject your savings to excessive volatility. However, this is not the only rule for risk management.

You should also consider investing just what you can stand to lose. Reduce the 10% if you don’t even have a balanced emergency fund and 10% to 20% of your money going into a retirement savings plan.

Understand how to use trading orders.

If you’ve established your brokerage account and budget, you can position stock orders through your online broker’s website or trading network. You’ll give multiple order form choices, which will determine how your trade process. These are the two most popular types of orders you can make:
- Limit order; Buys or sells the stock only at or above a predetermined amount. The cap price for a buy order is the most you’re able to pay, and the order will execute only if the stock price falls to or below that value.
- Market order; Buys or sells a stock as soon as possible at the best available price. That is why it names as a market order.
Use virtual account to learn trading.

Nothing is better than a free practice account, which investors can obtain by the virtual trading platforms provided by many online stock brokers. Paper trading allows consumers to practice their trading skills and develop a track record before putting actual money on the line.

Digital trading is available at some of the brokers we check, including TD Ameritrade and Interactive Brokers.

Compare the results to an acceptable benchmark.

This is critical guidance for all buyers, not just committed ones. The ultimate aim of stock selection is to outperform a benchmark index. This may be the Nasdaq composite index, the Standard and Poor’s 500 index, or other smaller indices comprised of companies dependent on industry, size, and geography.

Use online tools and technology available widely on the internet. For example, you can use a sigma notation calculator – used for summation – to sum up, all of your profits term-wise.

Measuring returns is critical because if a serious investor is unable to outperform the benchmark which is something even experienced investors struggle with, it makes financial sense to invest in a low-cost index mutual fund or ETF. ETF is effectively a portfolio of stocks whose output strongly resembles that of one of the benchmark indices.

Don’t lose your vision.

Being a good investor does not necessitate being the first to identify the next great breakout stock. Thousands of seasoned traders have already heard that ABC supply is primed for a surge by the time you hear it, and the opportunity has most definitely been priced into the stock.

It might be too late to turn a fast profit, but that doesn’t mean you’re too late to the game. True great investments aim to have shareholder wealth for years, which is a compelling reason for treating aggressive investing as a passion rather than a last-ditch effort for fast riches.

Summing Up

Stock trading looks like child’s play from outside but it requires a lot of knowledge and practice for a beginner to perform well. Most of the people start practicing and leave it underway because of the lack of consistency and patience.

Every great achievement needs hard work and patience. So, if you are thinking about getting yourself into stock trading, or have already started it, don’t lose patience. One day, you will get the outcome you were always expecting.

Stock Trading: How to trade for profits in the Stock Market? Image by Mohamed Hassan from Pixabay.
June 3, 2021
EVA (Economic Value Added): Definition, Calculation, and Implementation!
Economic Value Added (EVA) is a value-based financial performance measure, an investment decision tool and it is also a performance measure reflecting the absolute amount of shareholder value created. The Concept of EVA (Economic Value Added): Definition of Economic Value Added, Calculation of Economic Value Added, Measurement of Economic Value Added, formula, and Implementation Economic Value Added!

Learn, Explain EVA (Economic Value Added) Meaning, Definition, Calculation, and Implementation!

It computes as the product of the “excess return” made on investment or investments and the capital invested in that investment or investments. Also learned, EVA (Economic Value Added) Meaning, Definition, Calculation, formula, and Implementation!

“Economic Value Added (EVA) is the net operating profit minus an appropriate charge for the opportunity cost of all capital invested in an enterprise or project. It is an estimate of true economic profit or the amount by which earnings exceed or fall short of the required minimum rate of return investors could get by investing in other securities of comparable risk.”

Economic Value Added (EVA) Meaning and definition is a variation of residual income with adjustments to how one calculates income and capital. Stern Stewart & Co., a consulting firm based in New York, introduced the concept of EVA as a measurement tool in 1989 and trademarked it. The EVA concept often calls Economic Profit (EP) to avoid problems caused by trademarking.

What is the Economic Value Added (EVA)?

Economic Value Added is the financial performance measure that comes closer than any other to capture the true economic profit of an enterprise; Economic Profit = Total revenues from the capital – Cost of capital. Also, The basic idea of this criterion is to find, in microeconomics; where it says that the main goal of a company is the maximization of profit. However, it does not mean book profit (the difference between revenues and costs) but economical profit. The difference between economic and book profit is economic profit. It is the difference between revenues and economic costs, which includes book costs and opportunity costs.

Opportunity costs present by the amount of money lost by not investing sources (like capital, labor, and so on) to the best alternative use. Opportunity costs, in reality, represent mainly by interests from equity capital including risk-reward and sometimes lost wages too. In short; Book profit = Revenues – Costs. This leads to the conclusion that economic profit appears when its amount is higher than “normal” profit derived from the average cost of capital invested both by creditors (cost interests) and owners– shareholders (opportunity costs). Also, This is the basic idea of the new measure, EVA.

Calculation of EVA (Economic Value Added):

Economic Value Added (EVA) calculator is an operational measure that differs from conventional earnings measures in two ways. First, it explicitly charges for the use of capital (residual income measure). Secondly, it adjusts reported earnings to minimize accounting distortions and to better match the timing of revenue and expense recognition. As such, wealth maximization correlates with EVA maximization. Also, A positive EVA indicates that a company is generating economic profits; a negative EVA indicates that it is not; A measure of a company’s financial performance based on the residual wealth calculated by deducting the cost of capital from its operating profit after taxes. It also knows as economic profit.

Defines:

Economic Value Added (EVA) is defined as the estimate of true economic profit, the amount by which earnings exceed or fall short of the required minimum rate of return investors could get by investing in other securities of comparable risk. It is the net operating profit minus the appropriate charge for the opportunity cost of capital investment in an enterprise (both debt and equity). Also, The capital charge is the most distinctive and important aspect of EVA. Under conventional accounting, most of the companies appear profitable.

However, many are actually destroying shareholder value because the profits they earn are less than their cost of capital. Also, EVA corrects this error by explicitly recognizing that when managers employ capital, they must pay for it. By considering all capital costs, including the cost of equity, EVA shows the amount of wealth a business has created or destroyed in each reporting period.

Formula:

Expressed as a formula, Economic Value Added (EVA) for a given period can write as:

Economic Value Added (EVA) = NOPAT – Cost of Capital Employed = NOPAT – WACC x CE

Where 01;
- NOPAT: Refers to the amount of profit remaining of the business after tax and adding back interest payments. Also, It can calculate as per accounting concept after making necessary adjustments for certain non-operating incomes and expenses.
- WACC: Weighted Average Cost of Capital. It defines as the weighted average cost of both equity capital and debt. Also, It is the weighted average of both the specified costs with weights equal to the proportion of each in total capital. The tax shield of the debt adjusts with the cost of the debt.
- CE: Capital employed or Invested capital refers to total assets (net of revaluation) net of non-interest-bearing liabilities. From an operating perspective, invested capital can define as Net Fixed Assets, plus investments plus Net Current Assets. Net Current Assets denote current assets net of Non-Interest Bearing Current Liabilities (NIBCLS). From a financing perspective, the same can define as Net Worth plus total borrowings. Total borrowings denote all interest-bearing debts.
OR equivalently, if the rate of return defines as NOPAT /Capital Employed; then, it tums into a more revealing formula.

EVA (Economic Value Added) = (Rate of Return – Cost of Capital) x Capital Employed

Where 02;
- Rate of Return: NOPAT /Capital Employed
- Capital Employed: Total of the balance sheet – Non Interest Bearing Current Liabilities (NIBCL) in the beginning of the year
- Cost of Capital: (Cost of equity x Proportion of equity in Capital) + (Cost of debt x Proportion of debt in Capital)(1- Tax)
If Return on Investment defines as above after taxes; EVA can present with the following familiar terms:

EVA (Economic Value Added) = (ROI – WACC) x Capital Employed

Where 03;
- Capital Employed: Net fixed assets – Revenue reserve – Capital Work in progress + Current assets – Funds Deployed outside the business – NIBCL
Measure:

EVA (Economic Value Added) measures by comparing Return on Capital Employed with Cost of Capita; also called Return Spread. A positive Return Spread indicates that earning is more than the cost of capital; thereby creating wealth for owners or stockholders. A negative Return Spread means earning is less than cost-of-capital; thus reducing the wealth of owners and stockholders. Economic Value Added (EVA) is an indicator of the market value of the service center’s owner’s equity, a measure especially important to closely-held companies; which do not have the benefit of a published stock price. For publicly traded companies, EVA correlates very closely with the stock price.

Economic Value Added (EVA) is an estimate of true economic profit and a tool that focuses on maximizing shareholders’ wealth. Also, Companies best utilize EVA as a comprehensive management tool. EVA has the strategic importance of focusing management and employees on the company’s primary goal of maximizing shareholder value. With this goal in mind, EVA can use tactically in several ways including shareholder reporting, financial benchmarking, management decision-making tools, and a foundation for incentive compensation plans.

Measurement of EVA (Economic Value Added):

It must note that the measurement of Economic Value Added (EVA) can make by using either an operating or financing approach. Under the operating approach, deducting cash operating expenses and depreciation from sales derives NOPAT. Interest expense excludes because it considers as a financing charge. Also, Adjustments, which refer to as equity equivalent adjustments, design; to reflect economic reality and move income and capital to a more economically based value. These adjustments consider with cash taxes deducted to arrive at NOPAT. EVA then measure by deducting the company’s cost of capital from the NOPAT value. The amount of capital to use in the EVA calculations is the same under either the operating or financing approach but calculate differently.

The operating approach starts with assets and builds up to invested capital, including adjustments for economically derived equity equivalent values. The financing approach, on the other hand, starts with debt and adds all equity and equity equivalents to arrive at the invested capital. Finally, the weighted average cost of capital; based on the relative values of debt and equity and their respective cost rates; use to arrive at the cost of capital multiplied by the capital employed and deducted from the NOPAT value. The resulting amount is the current period’s EVA.

Implementing EVA (Economic Value Added):

When a company decides to adopt EVA as a corporate performance measure; here is what it must do:
- Step 1: Run an EVA analysis of the company; its publicly traded peers and business units.
- Step 2: Draw up a definition of EVA that is simple and meets the company’s information needs, existing accounting data, organization, and management.
- Step 3: Work out a compensation scheme that fits into the company’s business and culture. The incentive plan has to marry the EVA design with traditional concerns of shareholders and directors.
- Step 4: Train all employees on the basics of EVA and how it affects shareholder value.
- Step 5: Demonstrate the difference between EVA-led decisions vis-à-vis conventional methods through computer simulation exercises.
Positives of EVA:
- No ceiling on the amount managers can take home as incentive pay.
- Managers think like, act like, and are paid like owners.
- Targets are set over a time horizon that is more than one year – usually three to five years – forcing a long-term view into managerial decision-making.
- Cuts capital cost and inculcates financial discipline among employees.
- Increasing EVA directly benefits the shareholder and has been found to have a positive influence on a company’s stock price.
Negatives of EVA:
- Involves lots of complexity. Globally, Stern Stewart is said, in some cases, to make as many as 165 adjustments to work out the weighted average capital cost of companies.
- Works better at the individual level than team level, unless goals are appropriately structured.
- May make companies risk-averse. Also, New investments that look risky or difficult to quantify in terms of expected payback may never be made using EVA.
EVA (Economic Value Added): Meaning, Definition, Calculation, and Implementation; Image from Pixabay.
June 1, 2018