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Bacidore, J. M., J. A. Boquist, T. T. Milbourn and A. V. Thakor. 1997. The search for the best financial performance measure. Financial Analysts Journal (May/June): 11-20.

Summary by Summary by Kerry A. Martin
Master of Accountancy Program
University of South Florida, Summer 2002

EVA Main Page | ROI Main Page | Performance Measurements Main Page

Performance measures are needed for decisions regarding management compensation packages and resource allocation. Initial measures revolved around “stock price”, but did not adequately reflect performance. In 1991, Stern Stewart Management Services created Economic Value Added (EVA), a measurement that correlated with changes in shareholder wealth, but was not subject to random variations in stock price. This article analyzes EVA and introduces Refined Economic Value Added (REVA) as a better measure of management performance.

Strategy, Value, and the Choice of Performance Measure

To properly evaluate a firm’s operations, it is imperative to consider 1) the firm’s value, 2) amount of invested capital, and 3) return on investment:

Invested Capital, Strategy and Value

An appropriate measure of management and management strategy must consider the value of a company in economic terms. Value of a company can be measured in book-value figures and market value-figures. The difference can be considered an assessment of the value of the firm’s competitive strategy.

Net Present Value of Current and Future Investment Opportunities

+ Economic Book Value of Assets*

= Market Value of a Firm

*Assets in Place (minus liabilities) = Economic Book Value of Assets. Assets in Place are adjusted from historical-cost-based GAAP values to closer match their economic replacement values or liquidation values. Future opportunities need also be assessed.

How Much Capital is Invested in the Firm

Performance measures should also point out investment capital and profits generated using that capital. Net profit, then, is defined as the residual (after tax) monies after investment capital is returned based on book-value of assets with an additional capital charge as “cost of capital”. EVA uses this measure; however, the writers believe that the measurement should be based on the market-value and not the book-value approach. This minor difference is a basis of REVA as opposed to EVA.

Operating Versus Trading-Based Performance

EVA is an operating performance measure. It focuses solely on operating performance over a given period; typically a month, or year. Trading-based performance measures, on the other hand, focus on a firm’s stock price. It captures revisions in the market’s beliefs about the firm’s entire future stream of operating performances. Over time, the two different measures will diverge, but given a sufficiently long time horizon, they will again converge.

The difference between an expected rate of return and actual rate of return, although stock price related, can be used to assess operating performance.

REVA as a High-level Performance Measure

REVA is a performance measure that considers net operating income after taxes, the amount of capital invested, and the required rate of return on capital.

What is REVA

“EVA” is defined as the Net Operating Profit After Taxes – (the weighted average cost of capital x the adjusted book value of net capital at the beginning of the period). REVA is conceptually different in that it uses the market-value and market based weighted average cost of capital.

EVA and REVA Compared

The key distinction between EVA and REVA is that REVA assesses its capital charge for a period on the “market value” of the firm at the end of the period rather than on the “economic book-value” of the assets in place.


EVA = NOPAT – ($4,000 x 10%) where $4,000 is book-value of firm

= $450 - $400

= $50

REVA = NOPAT – ($5,000 x 10%) where $5,000 is market-value of firm

= $450 - $500

= -$50

According to REVA, this firm has destroyed $50 in shareholder value.

Flows to Equity versus Total Flows to All Financiers

According to the authors, REVA can be computed based on total operating flows to debt and equity or only on the flows to equity. This capability is true for EVA only when the market values of debt and equity coincide with their respective economic book values.

Organization Level and Choice of Financial Measure

REVA considers the market-value (strategy is incorporated) of a firm. Strategy of senior executives is considered in the REVA performance measure. EVA, however, represents only the physical assets in place. Thus, REVA could be used to compensate senior management and EVA could be used to compensate divisional managers and those below them.


Performance measures to evaluate operating results are used for allocating resources and determining compensation packages for managers. The most appropriate measure is the return shareholders earn through stock price appreciation and dividends in excess of an expected rate of return. The authors of this article determined that although EVA does measure performance well, REVA is a more appropriate measure. The consensus is based on using the market-value of the firm in valuing calculations as opposed to book-value figures. The authors explain on page 19 that REVA assesses a capital charge for a period equal to the weighted-average cost of capital times the market value of the firm at the beginning of the period. This allows the computation of REVA using either flows to equity or flows to all financiers, which is not possible with EVA unless market-value and book-value are coincidently equal.


Related Summaries:

Chan, Y. L. and B. E. Lynn. 1991. Performance evaluation and the analytic hierarchy process. Journal of Management Accounting Research (3): 57-87. (Summary).

Clinton, B. D. and S. Chen. 1998. Do new performance measures measure up? Management Accounting (October): 38, 40-43. (Summary).

Dierks, P. A. and A. Patel. 1997. What is EVA, and how can it help your company? Management Accounting (November): 52-58. (Summary).

Epstein, M. J. and S. D. Young. 1999. Greening with EVA. Management Accounting (January): 45-49. (Summary).

Fera, N. 1997. Using shareholder value to evaluate strategic choices. Management Accounting (November): 47-51. (Summary).

Ittner, C. D. and D. F. Larcker. 1998. Innovations in performance measurement: Trends and research implications. Journal of Management Accounting Research (10): 205-238. (Summary).

Jalbert, T. and S. P. Landry. 2003. Which performance measurement is best for your company? Management Accounting Quarterly (Spring): 32-41. (Discussion of EVA, tracking stock and balanced scorecard). (Summary).

Lev, B. 2004. Sharpening the intangibles edge. Harvard Business Review (June): 109-116. (Summary).

Wallace, J. S. 1998. EVA® Financial systems: Management perspectives. Advances in Management Accounting (6): 1-15. (Summary).