Hi Saurab, EVA is one of the two methods I use in valuing a company. I think it is among the best methods out there (After Modigliani Miller), the interesting thing with an EVA is that upon performing a discounted EVA valuation, you will (if done correctly) arrive at the exact same answer as that arrived at through a DCF.
A simple explanation of EVA as a concept - The main point here is that growth by itself does not add value. It is only valuable if its incremental returns are higher than it's incremental cost of capital.
Example - Company XYZ has a cost of capital (WACC) of lets say 12%. It's return on capital employed = 15% and it employs 1000cr of capital. the value added therefore = 3% (15 - 12) * 1000cr = 30cr.
An interesting point to note here is the same company XYZ, if it earns an incremental return of let's say 11% on growth, that growth is actually value destroying. Why would companies do that, you may ask? Simple - because they are transfixed on EPS.
Example - Company XYZ can borrow at 9% (cost of debt let's say) and can earn a return of 11% on that borrowed capital by investing it in the business. So if a company borrows let's say 500 cr. their EBITDA will increase by 11% x 500cr & their net profit, EPS etc will also optically appear to grow at some % of that incremental 500cr.
So while optically their earnings look great, EPS growth, EBITDA growth etc. they are actually destroying shareholder value. You will be surprised how often this happens (In my reckoning nearly 30% of all companies in the NIFTY (Supposedly blue chip) companies) indulge in this, and their managements are hailed as great.
Take RIL or any other company of your choice as an example. They barely earn 9% on their capital employed. Clearly the cost of debt itself is itself 8 - 8.5% + the cost of equity (let's say 15%) With a D/E ratio of 0.6 , WACC is approx 12 - 13% (All numbers are approximate)
So does it make sense for RIL to grow, by investing in expanding their current business if it only earns 9%? Sure their earnings will grow, their EPS will grow etc. But they aren't even earning their cost of capital!!
That's why people use EVA as a metric, because what shareholders care about (or should care about) is not earnings growth , but how much incremental value the company adds.
Hope this helps.
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