Brief on EVA in ISS Analysis Provides Useful Background on Complex Metric
May 11, 2019
A new TowersWatson primer on EVA is helpful as ISS continues to look for ways to incorporate the complex metric into its research and analysis. The brief notes that the concept behind EVA is simple: “EVA is a financial measure of a company’s residual profit after accounting for the cost of capital. If a company’s net operating profit exceeds its cost of capital, it is creating value. If not, it is destroying value.” However, as the Center has explained, the devil is in the details, and ISS has incorporated four EVA metrics into its research reports this year, although the results do not directly impact ISS’s voting recommendations:
EVA Momentum (sales)
Eva Momentum (capital)
The first two measures are evaluated over three years, while the momentum measurements are over four years. Towers also notes that ISS makes 15 non-GAAP adjustments to its EVA calculation, which includes treating R&D and capital expenditures as investments, rather than expenses and capitalizing restructuring costs.
The authors emphasize that companies should not look to incorporate EVA as a metric into incentive plans, but may want to review whether the metrics they are using reinforce value creation, as well as to take time to understand the drivers of EVA, especially if ISS and investors begin using it to a greater extent.