In times of crisis as at present the economic operations of an organisation must provide its stakeholders with an adequate and rewarding return on the funds bequeathed to it, said professor P.C. Narayan of the Indian Institute of Management, Banglore.

He was addressing the CFO forum Organized by the Institute of Chartered Accountants of Sri Lanka held at the Galadari Hotel yesterday.

Prof. Narayan explaining the relevance of using Economic Value Add (EVA) as a performance Measurement tool. In comparison with the traditional method of measuring performance, namely Return On Investment (ROI), EVA ensures that managers are obliged to create value for the shareholders because investors invest money in a company in order to get returns.

While ROI is sensitive to the choice of the accounting method, it is also backward looking and fails to consider risks.

Another method of measuring performance, based on Earnings Per Share (EPS) was also dealt with. Its defects were that focus on EPS may cause management to refrain from issuing equity when it is needed. EPS gains could also be fabricated by using more debt than prudent.

Harvard business review has stated "until a business returns a profit that is greater than its cost of capital, it operates at a loss".

It adds that just because a company has an "accounting profit; it does not mean that the company has an "economic profit".

EVA is net operating profit minus an appropriate charge for the opportunity cost of all capital invested in the enterprise.

Economic Value Added is the financial performance measure that comes closer than any other to capturing the true economic profit of an enterprise. EVA also is the performance measure most directly linked to the creation of shareholder wealth over time. Stern Stewart & Co. guides client companies through the implementation of a complete EVA-based financial management and incentive compensation system that gives managers superior information - and superior motivation - to make decisions that will create the greatest shareholder wealth in any publicly owned or private enterprise.

Put most simply, EVA is net operating profit minus an appropriate charge for the opportunity cost of all capital invested in an enterprise. As such, EVA is an estimate of true "economic" profit, or the amount by which earnings exceed or fall short of the required minimum rate of return that shareholders and lenders could get by investing in other securities of comparable risk.