Economic value added a useful gauge

INVESTING

Economic value added a useful gauge
Writer: NANCHANOK WONGSAMUTH
Published: 31/08/2009 at 12:00 AM
Newspaper section: Business
Investors should look beyond net profits and consider alternative tools in assessing the potential value of a business, according to Aekkachai Nittayagasetwat, dean of the business school of the National Institute of Development Administration.

While most people tend to focus on net profit as a guide, Mr Aekkachai said economic profit should also be factored into any investment decision.

"If you say that this company's profit is good, you still can't really judge whether it is a good company or not. But if you look at its economic value added (EVA), and it's positive, then you can make a judgement right away," he said.

EVA in corporate finance is a means of determining the value created for shareholders. A company with a positive value means that net operating profits, after tax, is higher than the opportunity cost of capital employed.

"EVA is also a good indicator of the performance of a company's executives, and whether they are able to obtain good EVA figures, or if profits outweighs total costs [including opportunity costs]," Mr Aekkachai said.

Sukit Udomsirikul, a senior assistant managing director of Siam City Research Institute, agreed that net profits alone do not tell the whole story.

"Companies that have a good net profit might have a negative EVA," he said.

Mr Aekkachai said investors would also do well to consider market value added (MVA) as well in assessing company performance.

Market value-added is the difference between the market value of a company and the capital contributed by investors. A positive value indicates that the firm has added value for investors.

Mr Aekkachai said difficulty in identifying certain variables, such as opportunity costs, was one reason why EVA and MVA were not widely used in Thailand.

Companies listed on the Stock Exchange of Thailand with the highest EVA and MVA scores going back to 2002 include PTT Plc, PTT Exploration and Production, Siam Cement, Siam City Cement, Ratchaburi Electricity, BEC World and Bumrungrad.

Lower-profile companies with low MVA scores but high EVA include Univanich Palm Oil, Precious Shipping, BEC World, Workpoint Entertainment and SE-Education.

Mr Aekkachai said these smaller companies were often overlooked by investors, despite delivering higher economic profit than some larger firms.

"Thai investors should be ready. If we use only basic accounting tools, we will not be able to estimate actual performance," he said.