Thursday, February 10, 2011

Economic Value Added – Advantages and Disadvantages

The economic value added is a strict utility, incorporating the traditional definition of capital costs contributed by the shareholders in the income statement. Think of a statement in which shareholders receive “interest” as well as creditors, as if charged for the capital in the business.

The economic value added, can also be seen as a set of administrative tools that take into account the gain that should be in the company to recover its investment.

As expected, the economic value added has some advantages that should be highlighted, among which we mention the fact recognize the importance of using capital (operating assets) and their associated costs for (cost of capital).

Another important advantage presented by the economic value added, is that it shows clearly the relationship between the operating margin and intense use of capital, so that can be used to identify opportunities for improvement and appropriate investment levels to achieve them.

Of course, the model presented by the economic value added are also some disadvantages, such as failure to consider the future prospects of the company, besides requiring a lot of adjustments to financial information company.

Moreover, taking into account the above, the economic value added requires a tradeoff between accuracy and simplicity of calculation, since very complicated adjustments resulted in a lack of credibility in the results.

So Mr. employer, now has many more tools to make the decision on starting the process of calculating the economic value added, taking into account all the advantages but also all the inconveniences that can be generated.

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