The application of economic value added as a performance measurement tool for Maltese listed companies : an investigation

Abstract

Economic value Added (EVA) is a performance metric which monitors the creation of shareholder value. The model considers the extent to which a company's earnings exceed or fall short of the required minimum rate of return for shareholders or lenders at comparable risk. EVA is estimated by deducting from the net operating profit a charge for the opportunity cost of the capital invested. It distinguishes itself from traditional financial performance measures such as net profit and earnings per share (EPS) by considering both the direct cost of debt and the indirect cost of equity. The idea is simple but rigorous: true profit should account for the cost of all sources of capital. This dissertation seeks to determine the broad perceptions of local practitioners on the notion of EVA. In order to achieve this goal, interviews were held with the financial controllers of Maltese listed companies and licensed stockbrokers. The model is also applied to the respective listed companies in order to ascertain the potential of these entities to enhance shareholder value in absolute terms. Subsequently, companies are ranked according to the results attained and any relationship that exists between the resulting EVA figures and EPS, one of the most widely cited traditional measures of performance, are examined.