APPROPRIATENESS OF ECONOMIC VALUE ADDED METHOD FOR THE COMPANY’S VALUE DETERMINATION

Some companies declare a profit as a goal, other – customers’ satisfaction, revenue growth, international expansion, and so on. Establishing the following goals, related to increasing cash flow, the companies usually ignore the initial condition for the company formation – an increase in shareholders’ wealth, along with value of the company, which is important in order to maintain and increase market competitiveness. In addition, to assess the achievement of the goals, the companies calculate the number of different financial indicators that, although interrelated, but cannot guarantee connection between decision making and general goal – value creation. For this, Economic Value Added method, which assesses value of the capital invested and return on investment, could be used. In relation to other methods it is more suitable due to the fact that this method is easily understood and calculated, promotes the efficient use of capital, evaluates economic profit, quality of management decision making, determines value creation of future periods, shows contribution of the individual business units for value creation, motivates management and employees, helps to understand and implement the company’s goal – to create value, etc. Research methods: analysis of economics, management, accounting and other scientific literature, comparison, systematization, summation, modeling and graphical representation. Research findings. From the economic point of view, value is created when a company generates revenue, greater than the economic cost of these revenue. Value creation as a performance criterion is the main goal of the company, that only can be implemented by combining operational, investment and financing decisions. Not only shareholders, who demand return on invested capital and risk, are interested in value creation, but also the company’s managers and employees, whose wage depends on created value. Due to the changes in financial market, the traditional performance methods such as profit and related rates were considered as inefficient, because they assessed the return on invested capital, but did not take into account the cost of equity capital. Therefore, instead of these, the modern performance methods, exclusively Economic Value Added, are proposed to use in order to assess value. Value of the company becoming more and more important, Economic Value Added method is used as a measure of performance which accurately reflects the company’s ability to create value, ensure the normal operation of the existence and adequacy of funds for development. Easily calculated method not only allows to assess value of the company, but also evaluates all of its operations and quality of management – operational, investment and financing – decisions. Still, it has to be admitted that Economic Value Added method has some limitations such as industry in which the company operates, inflation and necessity of the method for determining accurately the cost of capital and the traditional financial statements correction. Since the company does not directly increase its value, the company can do it within a manageable value factors. The authors propose a theoretical model of Economic Value Added method’s adaptability for the company’s value determination. It consists of five phases: corporate strategy, business modeling, performance measurement system, performance evaluation and performance analysis and improvement. The third and fourth phases of the model should be based on Economic Value Added method. DOI: https://doi.org/10.15544/ssaf.2014.1