Tuesday, 7 October 2014

Economic value added – A better measure of corporate evaluation

Economic value added as a measure of corporate evaluation was developed to address the shortcomings of traditional evaluation techniques like EPS, ROE. If a company is formed with a capital of Rs.10 Crores and the entire capital is invested in fixed deposits at an interest rate of 10%, the company will have a return on capital employed of 10% and it will have an annual growth rate of 10% on its income. But the question is whether the company is adding any value to the shareholders? This is an important question to be answered by all the companies. But our traditional evaluation techniques would give a better rating for the hypothetical company we discussed above.
To avoid this kind of misinformation, EVA was developed as a measuring tool for company’s performance.
EVA = NOPAT – (WACC x Capital Employed)
EVA does not use net profit as such from profit and loss statement. It makes adjustments for tax, valuation of stock, depreciation of assets etc. The Net profit after all the adjustments is called NOPAT. By making these adjustments, EVA tries to overcome the draw backs of traditional evaluation techniques which are based on Net Profit. EVA is calculated by subtracting the return on capital employed (based on Weighted Average Cost of Capital) from Net Operating Profit After Tax (NOPAT). The residual value is the value added by the company for time period. If the residual value (EVA) is positive, then the company has added value to the share holders and to the economy and if the residue value is negative, the company has destroyed value. 
So compared to traditional evaluation techniques, EVA is a better measure of corporate evaluation. But EVA is not free from drawbacks. To calculate the value of NOPAT in its stricter sense, companies have to make more than 100 adjustments to Net profit. Many companies hesitate to compute and disclose EVA because of the complexities involved.

Disruptive Innovation in Indian Higher Education

Recently I chanced upon this term ‘disruptive innovation’ while searching for some resources for my management class. I had heard it earlier, but did not go deeper then. Anyways, this time around I decided to spend a few minutes to understand this concept. Disruptive innovation is a term used in business and technology literature to describe innovations that improve a product or service in ways that the market does not expect, typically first by designing for a different set of consumers in a new market and later by lowering prices in the existing market (Wikipedia, 2014). It is different from other forms of innovations, sustainable or revolutionary, in a way that it creates a new market and eventually disrupts the existing markets as well. Tata Nano can be considered as a disruptive innovation in India as it created a unique new market of low cost cars and slowly disrupted the business models of the existing car market.
I think higher education around the world also is going through some disruptive shake outs, the momentum gained by MOOCs being a perfect example. MOOCs have been started for a new market of online learners, but soon made massive inroads to all levels of education. Traditional universities are compelled to take note and look for ways to connect with it.
As I walk into my classroom and see the passive and often ‘blank’ faces of too many students in front of me, I feel that it’s time some form of disruptive innovation emerges in our classrooms as well. I firmly believe that technology offers a tremendous opportunity to innovate and engage this digital generation. Leveraging on the revolution of tablets and smart phones, the walls of the class rooms have to be broken beyond its constraints of time and space. The onus is on us to identify and experiment with lessons, projects, assessment and different aspects related to teaching learning process harnessing the possibilities technology offers. 
MOOCs have shown an example how innovation is possible in otherwise an ultra-stable environment of education and universities. As a community of Academic 

Entrepreneurs, we have to innovate, may be do a disruptive one, sooner the better!