Toward better measurement of financial performance: A robust OEVA–TEVA alternative to biased EVA

Authors

  • Rauf G. Ibragimov Higher School of Finance and Management, Russian Presidential Academy of National Economy and Public Administration, Russia
  • Ignacio Vélez-Pareja Grupo Consultor CAV (Capital Advisory and Valuation), Colombia

DOI:

https://doi.org/10.21638/spbu18.2019.201

Abstract

We demonstrate analytically and illustrate with examples that the conventional measures of the residual operating income such as the Economic Value Added (EVA) are biased by design and so may yield a misleading assessment of financial performance. Fundamentally, the magnitude of the measurement error depends on the amount of realized interest tax shields and the book to value ratio. Other potentially significant sources of distortions induced by the EVA design are identified as well. We propose a robust alternative that is a concurrent evaluation of the firm’s operating and total performance by means of two related metrics, the Operating EVA (OEVA) and the Total EVA (TEVA). Coherent implementation of the OEVA–TEVA technique is simpler than the EVA both analytically and computationally. It is also able to provide additional information for the management decision making. The overall consistency of the OEVA–TEVA approach is supported by a formally proved equivalence of the corresponding OEVA–TEVA valuation model to the fundamental valuation by the cash flow discounting.

Keywords:

financial performance measurement, operating EVA, total EVA, economic value added, market value added, valuation

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References


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Published

2019-07-17

How to Cite

Ibragimov, R. . G., & Vélez-Pareja, I. (2019). Toward better measurement of financial performance: A robust OEVA–TEVA alternative to biased EVA. Russian Management Journal, 17(2), 139–158. https://doi.org/10.21638/spbu18.2019.201

Issue

Vol. 17 No. 2 (2019)

Section

Theoretical and Empirical Studies

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Articles of the Russian Management Journal are open access distributed under the terms of the License Agreement with Saint Petersburg State University, which permits to the authors unrestricted distribution and self-archiving free of charge.