ROA versus EVA

My entry today is dedicated to these group of students, headed by a blogfriend, taking MBA at the University of the [ fill in the blank ] in Quezon City. I was asked by the group to help them understand ROA (return on assets) and EVA (economic value added) so they could apply the theory into a case they were analyzing. I gladly obliged and hope I was able to be one maternal grand lola mother to these kids. Here was my response to them.

EVA

Si EVA or (Economic Value Added ) is just another financial performance metric chorvaloo to calculate the true ever ever kung magkano talaga ang kinita nang isang negosyo.

Eh bakit pa, meron namang Income Statement chorva?

Yong Income Statement kasi is one basic financial statement chorvaloo ever that was agreed upon by the best reclassifying minds in the FASB, AICPA or PICPA at kung ano ano pang chalupa in the financial reporting standards chorvaloo. I said, basic. So, you?re not really forced by any sick presidential decree to use this sa mga managerial decisions ever dahil, kahit na result pa sya nang best minds, me mga weaknesses then sya ever. Isa na nga nito, is one criticism sa accounting na, hindi nya ina-account ang mga forgone opportunities kaya dumating si Super Eva.

Now, eye em not gonna discuss kung ano ang laman nang Income Statement chorva. Napakasimple nang abacusa kompyutada nya. Income minus expenses chorvalo minus taxes ever equals yun na yun, net income o kaya net loss. Basta, pretend ako na alam mo na yun.

Kapatid ba ni Darna si Eva? Hindi noh! Si Super EVA is calculated as net operating after taxes profit minus a charge for the opportunity cost of the capital invested.

Opportunity cost? You mean, pati ang lecheng opportunity sa PPP me cost? Leche ka! Pero tama ka bruhita!. Let?s say na ang cost ni Ka Pepe is $60 for 200 words taz wiz mo write. O, di yun ang magiging chenalyn ever mo as opportunity cost. It?s really nothing more than the cost of an alternative na pinalagpas mo. Kaya mahal maging tanga or ignorance is verrryy expensive. Hahaha!

Eh ano namang kagandahan nang lecheng si EVA?

Pang-managerial decision chorva lang sya tita. Pwede mong ingud-ngud si Eva para:

1. ) Makagawa ka nang organizational goals. Say ang goal mo is to get about $200 million tax credit awards sa mga low income housing. Bakit? Eh kasi pag pinalagpas mo, pwede mong ibenta ang $200 million tax credit nang $150 million na pede mong i-invest that would generate triple the amount. So, yon ang opportunity na mawawala seyo.
2. ) Performance measurement, determining bonuses, communication with shareholders and investors, motivation of managers and analyzing equity securities: eh kasi dahil malalaman mo ang mga opportunity costs mo, malalaman mo rin also kung gano Katanga at parating baraha na lang ang ina-atupag nang investment portfolio manager mo sa mga pinaglagpas na opportunity or mali-maling investment decisions based dun sa mga nag-lahong posibleng perang dumating. Getz?

ROA

Walang kasalanan si Boots Anson Roa dito. Ang ROA naman is Return on Assets at eto ang baby formula (Net Income divay divay Total Assets). I?m telling you, sa accounting? Puro ass. A lotta ass. Kaya nga mga asshole yong mga tiga Wall Street eh! Hahaha!

So? Eh anu ngayon?

Well, ang numerong isusuka nong baby formula is to give you an idea kung gano ka-efficient na ginagamet nang company ang lahaaaattttt nang assets nila para makapag-generate noong na-compute na Net Income sa Income Statement. Ibig sabihin, yang mga assets mo gurl, gamitin mo lahat to generate income for you. Otherwise, white elephant ang dating nya. Ba?t ka pa nag-invest (read: capital expenditures)? The higher the ROA number, the better, dahil ang company mo ay kumikita nang sangkaterbang anda sa kokonting investment.

Ok, analyze naten ang mga baby formula?s na to.

EVA

The Calculation
There are four steps in the calculation of EVA:

1. ) Calculate Net Operating Profit After Tax (NOPAT)
2. ) Calculate Total Invested Capital (TC)
3. ) Determine a Cost of Capital (WACC)
4. ) Calculate EVA = NOPAT ? WACC% * (TC)

Yung number 1 and 2, simple lang sya. Tong lintek na WACC, andaming kalechehan. Although pag ini-sa-isa mo, simple na lang.

Eto:

WACC is calculated by multiplying the cost of each capital component by its proportional weight and then summing:

Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm’s equity
D = market value of the firm’s debt
V = E + D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate

O divanetch? Shock u? Easy di ba?

ROA

Ang return on assets is very straight-forward. Eto.

Question: ano ba mas ok na basis for calculating incentive? ROA or EVA?

Reyna?s Answer: EVA.

Ang problema ko kasi sa ROA is that, masyadong broad ang laman nang total assets. To non-financial people, hirap ako to explain kung pano nakakapag-contribute say, ang fixed assets say sa net income. Things like that. Pano kung gaya nga that you have several investment portfolios in your assets but you have no clue na those were tied up pala sa mga MBS [mortgage-backed securities] (am using the current scenario), hirap ako i-explain.

Kaya, I?d choose EVA and I?ll tell you in a very simple way. Yong Income Statement based and measured on EVA is much more practical and explainable sa mga non-financial people.

P.U.M.A.S.A.K.A.Y.A.S.I.L.A.

Hahaha! I don’t know! Malalaman naten pag walang pumutak at pumiyok! Hahaha!

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Tagged as: EVA, Income Statement, ROA