A STUDY ON THE ECONOMIC VALUE ADDITION IN CHENNAI PETROLEUM CORPORATION AT ECLAT INNOVATION
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Economic Value Added is the financial performance measure that comes closer than any other to capturing the true economic profit of an enterprise.
EVA® also is the performance measure most directly linked to the creation of shareholder wealth over time. Stern Stewart & Co. guides client companies through the implementation of a complete EVA-based financial management and incentive compensation system that gives managers superior information - and superior motivation - to make decisions that will create the greatest shareholder wealth in any publicly owned or private enterprise.
Concept of Economic Value Addition
The concept of Eva states that in order to assess whether a company earns genuine profits, it is not only necessary that the company earns sufficient profit to cover the firms operating costs, but they should also cover the cost of capital, that is the cost of borrowed money in the Business as well as the owners fund deployed in the business.
In other words Eva is the Surplus (or) deficit that remains after levying a charge against after tax operating profit for the opportunity cost of all capital – equity as well as debt used to generate those profits.
EVA = NOPAT – COST OF CAPITAL* CAPITAL EMPLOYED
Where NOPAT = Net Operating Profit After Tax.
Net Operating Profit:
A company's potential cash earnings if its capitalization were unleveraged (that is, if it had no debt). NOPAT is frequently used in economic value added (EVA) calculations.
Calculated as: NOPAT = Operating Income x (1 - Tax Rate)
Objectives of the study
This study has the following broad objectives:-
• To examine whether the Chennai petroleum corporation limited has been able to generate value for its shareholders from 2010-2011 to 2014-2015
• To find out Net operating profit after tax (NOPAT) for the year 2010-2011 to 2014-2015
• To find out the Eva using NOPAT - Cost of Capital Employed.
• To compare the performance of the company applying traditional parameters like ROCE with EVA.
• To study the financial performance of CPCL