Summary of G. Bennett Stewart III's Best practice EVA

By IRB Media

Please note: This is a companion version & not the original book.

Book Preview: #1 EVA is a technique for improving the planning process and a framework for valuing decisions. It is the basis for bonus plans that turn managers and employees into owner/ operators. It is a great way for a management team to communicate its commitment to creating value for its investors.

#2 The cost of capital is not a cash cost you can see and touch. It is an opportunity cost, the cost to lenders and shareholders of giving up the returns they could otherwise expect to earn from investing their money in a stock and bond portfolio.

#3 The cost of capital is the amount of money a company loses due to the interest that it pays on its debt and the interest that it earns on its equity. It is a real cost that can be estimated using modern financial techniques.

#4 The capital charge is the amount of money a company needs to spend to obtain, and keep, an operating profit. It is computed by multiplying the cost of capital rate times the capital, which in this case is $1,000 invested in net business assets and a cost of 10 percent. The company must earn $100 in NOPAT to just break even.

• Language: English
• Publisher: IRB Media
• Release date: Feb 15, 2022
• ISBN: 9781669347736

IRB Media

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Book preview

Insights on G. Bennett Stewart's Best practice EVA

Contents

Insights from Chapter 1

Insights from Chapter 2

Insights from Chapter 3

Insights from Chapter 4

Insights from Chapter 5

Insights from Chapter 6

Insights from Chapter 7

Insights from Chapter 8

Insights from Chapter 9

Insights from Chapter 10

Insights from Chapter 11

Insights from Chapter 12

Insights from Chapter 13

Insights from Chapter 1

#1

EVA is a technique for improving the planning process and a framework for valuing decisions. It is the basis for bonus plans that turn managers and employees into owner/ operators. It is a great way for a management team to communicate its commitment to creating value for its investors.

#2

The cost of capital is not a cash cost you can see and touch. It is an opportunity cost, the cost to lenders and shareholders of giving up the returns they could otherwise expect to earn from investing their money in a stock and bond portfolio.

#3

The cost of capital is the amount of money a company loses due to the interest that it pays on its debt and the interest that it earns on its equity. It is a real cost that can be estimated using modern financial techniques.

#4

The capital charge is the amount of money a company needs to spend to obtain, and keep, an operating profit. It is computed by multiplying the cost of capital rate times the capital, which in this case is $1,000 invested in net business assets and a cost of 10 percent. The company must earn $100 in NOPAT to just break even.

#5

The capital charge is where accountability enters the EVA system. It is a benchmark for NOPAT that automatically rises or falls as more or less capital is invested in the business.

#6

The NOPAT performance bar is set higher as more capital is invested in a business, and the capital charge is automatically set lower as capital is withdrawn. With all other measures, an appropriate target has to be established or reestablished as circumstances or capital change, and that is not easy.

#7

The third metric is to purge ruthlessly. The last big improvement category is to stop pouring money into, or liquidating assets from, the unprofitable activities that cannot cover the cost of capital. Find ways to turn working capital faster, increase production yields and uptimes, sell assets worth more to others, and bring technology and products to market faster.

#8

The EVA bonus plan makes managers rich, as long as the shareholders make them filthy rich. The plan exposes managers to business risk, but should it be otherwise. Isolate managers from risk, and there will be no real risk management. Expose them to risk, and they will anticipate and manage risks.

#9

The first argument is that the cost of capital can be dramatically simplified by using a bonus plan like this one. Knowing that their bonuses are linked to producing EVA, managers in riskier divisions will naturally want to factor a more sizable return cushion into the capital projects they propose.

#10

The EVA bonus plan rewards breakaway thinking, achieving stretch goals, and openly collaborating. It truly leads to better, more energetic, more realistic,