EVALUATION OF COMPANY PERFORMANCE WITH ACCOUNTING AND ECONOMIC CRITERIA: Refined Economic Value AddedFrom the point of view of the participants at the economic life of the firm, and especially from the management; EVA gives explanations for the results obtained after applying a strategy or permits the comparison of results obtained with those that were at the strategy selection basis in the past, the viability of a strategy from the point of view of the economic and financial results expected in the future, so it can be a good criterion for selecting strategies.
From the potential investors’ point of view; EVA assures them regarding the fair price payment for the purchased shares and the maintenance of the future development potential of the enterprise according to the historical period trend; lastly from the creditors’ point of view it provides information regarding the credit amounts repayment and remuneration capacity of the firm.
The only cost of debts is calculated in calculating accounting profit, and cost of funds provided by shareholders is not calculated by the managers. But the concept of economic value added (EVA) calculates the cost of equity due to each fund have cost, and money does not come into the company itself. In the other words, the economic value added (EVA) is predicted from economic profit and it has different with accounting profit. Economic value added (EVA) causes that accounting profit closer to economic profit and evaluation of created value for shareholders is easier. Weaver believed that EVA is the lost ring between shareholder returns, economic returns, and accounting returns.
One of the deficiencies of economic value added (EVA), the reliance on historical figures. Although the economic value added (EVA) uses reliable information, but these data are not necessarily related. In other words, the EVA can be calculated the opportunity cost of resources used, based on their book value, while investors expected returns are based on market value. If investors sold the company to its market value and invest their proceeds in assets equal in risk, they could expect to earn a return identical to the firm’s weighted average cost of capital (WACC) to the firm’s overall market value and not only on the book value of the firm’s investment show in the balance sheet. Consequently, the capital charge has to reflect this opportunity cost of investors. Refined economic value added (REVA) provides an analytical framework for evaluating operating performance measure in the context of shareholder value creation. EVA performs quite well in terms of its correlation with shareholder value creation, but REVA is a theoretically superior measure for assessing whether a firm’s operational performance is adequate from the standpoint of comprehensive statistical analysis of both REVA and EVA is used to estimate their correlation with and their ability to predict shareholder value creation. REVA statistically outperforms EVA in this regard.
Economic value added (EVA) served as a criterion for value creation for shareholders, but refined economic value added (REVA) is a tool for better assessing whether a company’s performance has was good financial performance in the past or not. From EVA and REVA is used for predicting the value created for shareholders. Generally, the REVA used for external performance evaluation of company. REVA is a measure that more concerned with performance evaluation of top management levels. Instead EVA is the simple shape of these criteria, based on book value, and concerned with performance evaluation of lower levels of management in the firms (Darabi & Esfandiyari, 2009).