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SESSION

ON
EVA / ROCE

PERFORMANCE MEASUREMENT
SYSTEM

WHY COMPANY SHOULD PERFORM ?


TO GROW
ENHANCE SHARE HOLDERS VALUE
ECONOMIC DEVELOPMENT
PUBLIC IMAGE

HOW TO MEASURE?
AVAILABILITY OF VARIOUS
TOOLS

COMPONENTS OF WORKING CAPITAL

WC = CURRENT ASSETS (-) CURRENT LIABILITIES


CURRENT ASSETS (CA)
Inventories
Debtors (including retention)
Cash & bank balances
Advances paid
Deposits made
Prepaid expenses
CURRENT LIABILITIES (CL)
Sundry creditors (including retention)
Outstanding expenses (Payables for
suppliers/ subcontractors bills,
salary,wages etc..,)
Unadjusted advance with clients
Cash Overdrawn from bank

Performance Measurement Tools

LIQUIDITY
CURRENT RATIO & ACID TEST

LEVERAGES
DEBT EQUITY

&

DEBT ASSET

TURNOVER
INVENTORY TURNOVER ,
DEBTORS TURNOVER,
FIXED ASSETS TURNOVER &
TOTAL ASSETS TURNOVER

Performance Measurement Tools


(Cont)

VALUATION

PRICE EARNING RATIO

PROFITIABILITY

GROSS PROFIT - SALES,


NET PROFIT - SALES,

RETURN ON CAPITAL EMPLOYED


(ROCE) OR RETURN ON
INVESTMENT (ROI)
ECONOMIC

VALUE

ADDITION

P E R F O R M A N C E E V A L U V A T IO N P A R A M E T E R
EVA

R OCE

C O S T O F C A PIT A L

NGE

S A LE S
M A T E R IAL

LABO UR

ANFE

CO ST

TAX
P L AN T

OHs

ROCE / ROI
PROFIT
ROCE =

ROI =

SALES

12

------------SALES

X ------------- X -----------Av. FUNDS


PERIOD
EMPLOYED
PROFIT
12
-------------- X -----------Av. FUNDS PERIOD (MONTHS)
EMPLOYED

PROFIT
12
---------------------- X ------------TOTAL ASSETS
PERIOD (MONTH)

ROCE - ANALYSIS
Particulars
A
B
Capital Employed
Sales
Cost
Profit
Profit Ratio
ROCE

20
50
80
10
12
15
8
8
9
2
4
6
20% 33% 40%
10.00% 8.00% 7.50%

Calculation of ROCE & EVA (With sample data)


PARAMETER
Contact value
Contract duration
Sales
Less: Cost (Depreciation cost for machineries included say Rs. 5 L)
Gross Margin (GM)
Less: Regional & HQ Overheads @ 3% on Sales
Profit Before Tax (PBT)
Less: Tax @ 35% on PBT
Net Group Earnings (NGE)
Capital Charge @ 15% on ANFE (if ANFE = 75L)
Economic Value Addition (EVA)

Rs. Lakhs
100.00
15 Months
100.00
70.00
30.00
3.00
27.00
9.45
17.55
11.25
6.30

A
B
C=A-B
D
E=C-D
F=0.35*E
G=E-F
H
I=G-H

ROCE (Net) = (NGE/ANFE) X (12/Duration) X 100


18.72% J
ROCE (Gross)= (NGE+depreciation /(ANFE+Depreciation ) x (12 / Duration) x22.55%
100
K
Note:
Sales

Invoicing+Valued stock-contingency(as applicable) , in case of RSV Job s

Sales

Cost + Stock , in case of Cost Jobs

Cost

Cost of Materials + Labour + S/c +Temporary structures + overheads +Depreciation of P&M +


+Maintenance cost of P&M

(Subcontract cost includes hire charges for outside equipments.)

ANFE

Average Working Capital (AWC) + Average Net Fixed Assets

ANFA

Purchase value of Equipments - Depreciation

AGFE

Average Funds Employed

=
ROCE

Average Working Capital (AWC) + Average Gross Fixed Assets (AGFA) ( ANFA + Depreciation)
Return On Capital Employed

CALCULATION FOR WEIGHTED AVERAGE COST OF CAPITAL (WACC)


SOURCE

COST

DEBT

13.50%

EQUITY

20.00%

TAX @ 35%

4.73%

POST TAX
COST

DEBIT:EQUITY
RATIO

WEIGHTED
COST

9%

43

3.77

20%

57

11.4

100

15.17

WACC

15%

Computation of EVA / ROCE (Sample data)


Details / Mth.
SALES
CUM SALES
COST
CUM COST
GM
CUM GM

Rs/L

LOGIC
M1 M2 M3 M4 M5 M6 M7 M8 M9
M10 M11 M12 M13 M14 M15 TOTAL
A
100 120 100 150 130 120 100 150 200
150
150
120
100
160
150
2000
B
100 220 320 470 600 720 820 970 1170 1320 1470 1590 1690 1850 2000
C
60 72 60 90 78 72 95 143 190
150
150
120
60
96
90
1526
D
60 132 192 282 360 432 527 670 860 1010 1160 1280 1340 1436 1526
E=B-D
40 48 40 60 52 48
5
8
10
0
0
0
40
64
60
475
F
40 88 128 188 240 288 293 301 311
311
311
311
351
415
475
G
3
4
3
5
4
4
3
5
6
5
5
4
3
5
5
60
RG-HQ-OH@ 3% Sales
CUM OH
H
3
7 10 14 18 22 25
29
35
40
44
48
51
56
60
PBT
I=E-G
37 44 37 56 48 44
2
3
4
-5
-5
-4
37
59
56
415
CUM PBT
J
37 81 118 174 222 266 268 271 275
271
266
263
300
359
415
TAX @ 35%
K
13 16 13 19 17 16
1
1
1
-2
-2
-1
13
21
19
145
CUM TAX
L
13 28 41 61 78 93 94
95
96
95
93
92
105
126
145
NGE
M=I-K
24 29 24 36 31 29
1
2
3
-3
-3
-2
24
38
36
269
CUM NGE
N
24 53 77 113 144 173 174 176 179
176
173
171
195
233
269
Net Fixed Assets
O
700 800 1000 1250 1200 1150 1200 1000 1000 1300 1350 1200
800
600
400 14950
Cumu. NFA
P
700 1500 2500 3750 4950 6100 7300 8300 9300 10600 11950 13150 13950 14550 14950
Avg. NFA
Q
700 750 833 938 990 1017 1043 1038 1033 1060 1086 1096 1073 1039
997 14692
Current Assets
R
280 320 400 500 480 460 480 400 400
520
540
480
320
240
160
5980
Cum CA
S
280 600 1000 1500 1980 2440 2920 3320 3720 4240 4780 5260 5580 5820 5980
Avg. CA
T
280 300 333 375 396 407 417 415 413
424
435
438
429
416
399
5877
Curr. Liab (Ex. VC) U
175 200 250 313 300 288 300 250 250
325
338
300
200
150
100
3738
Cumulative CL
V
175 375 625 938 1238 1525 1825 2075 2325 2650 2988 3288 3488 3638 3738
Avg. CL
W
175 188 208 234 248 254 261 259 258
265
272
274
268
260
249
3673
Vendor Cr/(Dr)
X
53 60 75 94 90 86 90
75
-50
98
101
90
60
-50
30
901
CUM Vendor Cr/(Dr) Y
53 113 188 281 371 458 548 623 573
670
771
861
921
871
901
Avg. Vendor Cr.
Z
53 56 63 70 74 76 78
78
64
67
70
72
71
62
60
Avg WC
AA=T-W-Z
53 56 63 70 74 76 78
78
91
92
93
93
90
94
89
1190
ANFE
AB=Q+AA
753 806 896 1008 1064 1093 1121 1115 1125 1152 1179 1188 1163 1133 1086
Capital Charge
AC=AB*15%PA
9 10 11 13 13 14 14
14
14
14
15
15
15
14
14
199
Cum Capital Charge AD
9 19 31 43 57 70 84
98 112
127
141
156
171
185
199
EVA
AE=M-AC
15 19 13 23 18 15 -13 -12
-11
-17
-18
-17
10
24
22
71
CUM EVA
AF
15 33 46 70 88 103 90
78
67
49
32
15
24
48
71
ROCE (NET) (%)
38% 39% 34% 34% 33% 32% 27% 24% 21% 18% 16% 14% 15% 18% 20%

Calculations of ROCE
PARTICULARS

1999-2000 1998-1999 1997-1998

Sales (Incl. Other Income)

7599

7402

5768

Cost (incl Depreciation)

7217

6880

5178

382

522

590

41

52

59

341

470

531

4726
2287
2439
5364
7803
4.37%

4395
2391
2004
5044
7048
6.67%

3714
2134
1580
4645
6225
8.53%

Profit Before Tax


TAX
Proft After Tax - Net Group Earnings
Current Assets
Current Liabilities
Working Capital
Net Fixed Assets (incl. Investment)
Captial Employed
ROCE

TO IMPROVE ROCE

Material
Purchase of material (J I T) - Minimize inventory
Control of Wastages
Consumption as per norms
Proper rate negotiation & fixation
Utility of Rate Contracts
Usage of Quality material
Increase in Credit Terms
Disposal of scrap
Ensure Spl. Agency brought the required materials & Tools
Recovery rate for the material issue to the contractor
Reconciliation

TO IMPROVE ROCE

LABOUR
Avoid recruitment of excess / surplus labour
Minimum number of subcontractors
Rate fixation based on productivity
Proper rate analysis
Comparison of actual productivity with standard norms
Deploy right person for the right job
Minimizing Overtime engagement
Proper allocation of work front to the contractors
Engagement of registered contractors
Holding of retention money

TO IMPROVE ROCE

Plant & Machinery


Optimum utilization of equipment's
Mobilization & Demobilization at right time
Declare surplus items
Reducing External Hiring
Purchase of genuine spare parts
Engage skilled operators
Control on diesel consumption
Preventive maintenance

TO IMPROVE ROCE

Over heads
Control of travel & conveyance expenses
Optimum deployment of staff
Control on staff related expenses
Control on miscellaneous expenses
Reduction of cost of Infrastructure

ROCE - ADVANTAGES

Possible to compare different kinds of projects


with unequal life periods
different kinds of capital employed

Measures Performance
During a particular period
Over period of time

To compare with other industries & areas

Control on capital expenditure

Particulars
Project Duration (Month)
Sales
Cost ( Incl. Depreciation)
NGE
ACA
ACL
AWC
ANFA
ANFE
DEP
ROCE (NET)
ROCE (GROSS)

Case Studies
A
B
8

12
100
110

125

15

20
150
130

30
12

15
20
10

30

45

5
8
60

180
20
22

75
85
13

Case Studies-SOLUTIONS
Particulars
A
B C
Project Duration (Month)
Sales
Cost (Incl. Depreciation)
NGE
ACA
ACL
AWC
ANFA
ANFE
DEP
ROCE (NET)
ROCE (GROSS)

8
100
110
-10
30
12
18
30
48
2
NIL
NIL

12

15

20

125 150
110 130
15
20
20
13
10
5
10
8
45
60
55
68
5
8
27% 24%
33% 29%

180
160
20
22
12
10
75
85
13
14%
20%