It is quite interesting to know that EVA has did a total transformation to financial reporting. While ROCE is a total to relative measurement at step 1, EVA goes to second level of relative measurement and compares ROCE with total cost of capital..
Profit and loss account measure the financial performance but it doesn't factor the total investments made by the investor nor notional cost of equity share capital. And this limitation has been overcome by EVA.
ROCE (Return on Capital Employed) = EBIT / Capital Employed
and EVA = Capital Emplyed * (ROCE - WACC)
WACC (Weighted Average Cost of Capital) = Ke* We + Kd * Wd
where Ke= Cost of Equity, We = Weight of equity, Kd = Cost of Debt, Wd = Weight of Debt
Also Ke = Rf + β (Rf- Rm), (Rf-Rm) = Risk Premium, Rf = Risk Free Rate, β = A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
It is bit complex to derive the beta and hence the cost of equity for a unlisted company. I suggest to use the beta and market return for the same industry in stock exchanges. And if that industry is not being part of exchanges, then the nearest industry.
Profit and loss account measure the financial performance but it doesn't factor the total investments made by the investor nor notional cost of equity share capital. And this limitation has been overcome by EVA.
ROCE (Return on Capital Employed) = EBIT / Capital Employed
and EVA = Capital Emplyed * (ROCE - WACC)
WACC (Weighted Average Cost of Capital) = Ke* We + Kd * Wd
where Ke= Cost of Equity, We = Weight of equity, Kd = Cost of Debt, Wd = Weight of Debt
Also Ke = Rf + β (Rf- Rm), (Rf-Rm) = Risk Premium, Rf = Risk Free Rate, β = A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
It is bit complex to derive the beta and hence the cost of equity for a unlisted company. I suggest to use the beta and market return for the same industry in stock exchanges. And if that industry is not being part of exchanges, then the nearest industry.
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