The largest of China's state-owned enterprises adopt EVA as the best measure to assess their performance. EVA Dimensions Unveils a Significant New Performance Measure
Friday, September 4th, 2009Locust Valley, NY, September 3 – EVA Dimensions LLC has introduced a new performance metric that represents a true innovation in financial management and analysis. The metric is called EVA Momentum. It is the ratio of the change in a company’s economic profit in one period to its sales in the prior period. The creator of EVA Momentum is Bennett Stewart, chief executive of EVA Dimensions. Stewart was the principal creator of the EVA (economic value added) framework for performance measurement and business valuation nearly 30 years ago.
“EVA Momentum is a ratio that possesses enormous utility,” says Stewart. “Corporate executives can use it to directly compare the performances of different operating units, benchmark against public peers, diagnose the sources of good and bad performance, set corporate and divisional goals, value forward strategic plans, and for a number of other things. Securities analysts can use it to measure performance and judge equity values. And it should become a key metric for corporate governance watchdogs, and anyone who wants a complete and accurate summary score of how well a company is really doing.”
As with many innovations, EVA Momentum is a remarkably simple concept. To calculate it, all a company has to do is divide the change in its economic profit in one year by its sales in the preceding year.
Yet this simple concept is remarkably powerful. For one thing, it is the only financial ratio for which a higher value always is better than a lower one. That cannot be said for any other performance ratios, including return on assets, return on equity, or even earnings per share. As Michael Jensen, an emeritus professor at the Harvard Business School, and others have long observed, every other ratio can show “improvement” when performance actually is deteriorating.
EVA Momentum provides an unequivocal, black-and-white verdict on performance. If EVA Momentum is positive, performance has improved. If it is negative, so is the change in performance.
Levels of EVA Momentum are low, in no small part because the measure is so demanding. The long-run median EVA Momentum for companies in the Frank Russell 3000 stock index is just 0.2%. The 75th percentile performance is just 1%, and 90th percentile 3%. Those small differences in the ratio denote significant differences in true performance—and business value. Indeed, EVA Momentum is a key variable in an EVA Dimensions stock-ranking system called PRVit that has one of the best track records in forecasting relative stock returns among Street research.
It also is possible to calculate the level of EVA Momentum that investors expect given a company’s stock price. Stewart notes that current expectations for EVA Momentum for companies in the Russell 3000 are the lowest they have been going as far back as 1990.
Stewart explains EVA Momentum, its calculation and myriad uses in an article titled “EVA Momentum: The One Ratio That Tells the Whole Story,” published in the Spring 2009 issue of the Morgan Stanley Journal of Applied Corporate Finance. To learn more about EVA Momentum, download a pdf of the article.
Stewart formed EVA Dimensions in 2006 after leaving the consulting firm Stern Stewart & Co., where he was a founding partner. EVA Dimensions provides software and databases to measure, track, benchmark and value EVA Momentum and a host of related performance, risk, and valuation statistics.
For More Information contact Maureen Campbell at 862-242-8538; mcampbell@evadimensions.com