A critical review of economic value added (EVA) as a measure to evaluate the financial performance of milk producers

Abstract

Farm profitability and the measurement of such profitability are usually calculated by traditional profitability measures such as return on equity (ROE), return on assets (ROA), net farm income (NFI) and the operating profit margin (OPM). The emergence of economic value added (EVA) during the 1990’s has changed the field of performance measurement. The question arises whether the new value measurement can give a better answer about value creation than traditional measures in specific areas such as farm profitability. This study examines the applicability of EVA as a measurement tool to measure the profitability and value creation by a sample South African milk producers. Milk production is one of the most important agricultural products in the economy. Fresh milk is ranked ninth among the top 20 gross production value contributors in agriculture in South Africa. The study reviewed EVA and few traditional measures (ROA, ROE, NFI and OPM). The literature review formed the basis for the application. The main objective of this study was to calculate and evaluate EVA as a financial performance measure that can be used by milk producers. Further objectives were to evaluate the financial performance of six milk producers, to determine whether these milk producers created value, and to compare EVA with traditional measures to see whether EVA is a better measure of wealth creation than other profitability measures. Based on the calculations using the traditional measures, it can be conclude that only four farms were profitable and that the other two were unprofitable. Although three farms of the four profitable ones had low returns, the results suggested that they were still profitable and that value has been created. Based on the EVA calculation, only one farm created value while the rest destroyed it. A comparison achieved using these measures shows that EVA gives the clearest results, while the traditional measures were misleading in three of the farms. A comparison of EVA and the four traditional measures showed that EVA was the best measure and gave more reliable results than the traditional measures in some cases. From the results it could be concluded that the EVA and the traditional measures can fruitfully be used together. EVA should take the commanding role, while the traditional measures can provide additional information.