Total Stakeholder Return and Economic Value Added

DISTINCTION BETWEEN TOTAL SHAREHOLDER RETURN AND ECONOMIC VALUE ADDED.

DADZIE GILBERT OFORI

Total Shareholder Return (TSR) represent the change in the capital value of a listed company over a period (typically one (1) year longer), plus dividends, expressed as a plus or minus percentage of the opening value.

Due to its nature, Total shareholder has the following characteristics;

-It cannot be calculated at the divisional level (strategic business unit) and below.

-It cannot be observed for privately held companies.

Total Shareholder Returns (TSR) can easily compare from company to company, and benchmarked against industry or market returns, without having to worry about size bias.

It is calculated as TSR

= (share price end of period –share price begin of period) + dividends

Share price begin of period.

While as, Economic Value Added (EVA) is an estimate of a firm’s economic profit being the value created in excess of the required return of the company’s investors (being the shareholders and debt holders). Quite simply, EVA is the profit earned by the firm less the cost of financing the firm’s capital. The idea is that value is created when the return on the firm’s economic capital employed is greater than the cost of that capital. EVA is a net operating profit after taxes or (NOPAT) less as capital charge, the latter being the cost of capital and the economic capital.

The basic formula is EVA = (R-C).K

EVA = Net operating Profit After Tax (NOPAT) –C.K

Where, r = NOPAT /k, i.e. return capital on invested capital

C= the weighted average loss of capital

K= the economic capital employed.

KEY DISTINCTION

TSR | EVA |

This is a return to the shareholder who buys shares at the beginning and sells the end. | This is dividends received by the shareholders, when there is excess profit |...