A comparative analysis of Economic Value Added (EVA®) by South African banking and retail companies listed on the Johannesburg Stock Exchange

Abstract

EVA® is a performance metric that calculates the creation of shareholder value and is a registered trademark of Stern Stuart, New York. EVA® has been widely adopted by management when making decisions to increase productivity, where to invest new capital and which underperforming assets to liquidate. EVA® is also widely used by investors and analysts as a measure of company performance when deciding on which shares to invest in. While extensive research was done on EVA® and share price performance internationally, the aim of this research was to determine whether a positive EVA® leads to growth in its share price, specifically for retail and banking shares listed on the Johannesburg Securities Exchange (JSE). The banking and retail sector was selected as both these sectors experience favourable growth in terms of turnover during decreasing interest rate periods and unfavourable growth during increasing interest rate periods. Thus EVA® was selected as one of the better performance measures to use to show true operating performance. Statistical tests were done on turnover growth rates, EVA® growth rates, EVA® and Turnover, EVA® and Share Price growth and finally EVA® and other common performance measures. Common performance measures were limited to Price/Earnings, Earnings Per Share, Return On Assets and Earnings Before Interest, Tax, Depreciation and Amortisation. After analysis of the results, it was found that turnover growth rates were statistically similar for the banking sector during the period 1998 to 2007, but not for the retail sector. Leading on from that it was found that share price correlates well with EVA® for the banking sector however not for the retail sector. The study also further revealed that none of the common performance measures correlated well with EVA for both the banking and retail sector. Copyright