Analysing performance through value creation

• Author: Trifan A., Suciu Gh.
• Pages: 319-326

Bulletin of the Transilvania University of Braşov

Series V: Economic Sciences • Vol. 8 (57) No. 2 - 2015

Analysing performance through value creation

Adrian TRIFAN1, Gheorghe SUCIU2

Abstract: This paper draws a parallel between measuring financial performance in 2

variants: the first one using data offered by accounting, which lays emphasis on maximizing

profit, and the second one which aims to create value. The traditional approach to

performance is based on some indicators from accounting data: ROI, ROE, EPS. The

traditional management, based on analysing the data from accounting, has shown its limits,

and a new approach is needed, based on creating value. The evaluation of value based

performance tries to avoid the errors due to accounting data, by using other specific

indicators: EVA, MVA, TSR, CVA. The main objective is shifted from maximizing the income

to maximizing the value created for shareholders. The theoretical part is accompanied by a

practical analysis regarding the creation of value and an analysis of the main indicators

which evaluate this concept.

Key-words: value creation, total shareholder return, economic value added, market value

added, cash value added

1. Introduction

Establishing a company’s performance is a topical subject which concerns those

involved in economic activities: shareholders, managers, employees, creditors,

clients, banks, central or local organs of administration. In the beginning, profit was

considered to be the most representative indicator to evaluate performance. Lately,

performance is associated to the concept of value creation.

The English economist Alfred Marshal, in his work Principles of Economics,

from 1890, considered that profit is what remains after the deduction of the interest

of the capital invested at a current rate (what we now call the rate of return wanted

by the shareholders).

In 1961, Franco Modigliani and Merton Miller, published in the Journal of

Business, an article called Dividend Policy, Growth and the Valuation of Shares, in

which they presented the concept of value creation management.

Globalization led to a very fast movement of capital. Investors want to

recover the invested amounts under low risk condition. Recovering the investments

1 Transilvania University of Braşov, adrian.trifan@unitbv.ro

2 Dimitrie Cantemir Christian University from Bucharest, ucdc.suciu.g@gmail.com