EVA – Baap of ROI/trending method for BoxOffice

The first and foremost measure of performance that comes to one’s mind is profit/ROI- the accounting measure of performance. Someone has aptly said- profit is an opinion, not the fact. If this were not case , one would not have seen the debacle of big companies like Enron, World Com etc. All such companies managed their earnings well and have shown better performance in terms of ROI.

The thing is traditional measures ignore the definite requirement that the rate of return should be at least as high as the cost of capital.The cost of capital is the rate of return required to persuade the investor to make a given investment.Or a bare minimum margin which the investor expects by making a certain amount of investment.Economic Value Added (EVA) is a financial performance method to calculate the true economic profit of an investment. EVA can be calculated as net income minus a charge for the opportunity cost of the capital invested.

If EVA = 0 , Investment value neither added or eroded
EVA >1 , Investment value enhanced
EVA < 1 ,Investment value eroded.

The biggest catch of EVA is that it can be negative even for investments which have positive income!

EVA takes into account some major factors – it takes earnings,the expectations of the investor (cost of capital),time value of money,opportunity cost of capital.The only tricky thing in this is to arrive at the cost of capital. But there is a way to it.

During ETT ,I heard a lot of ppl trash its performance.They said it didnt maximise its market potential as 3 idiots did in 2009; even though the BO gross between the two was not much different.I will now calculate the margin of 3i and will assume this as the cost of capital for other films to arrive at the EVA. By doing so, I wil be able to judge the films taking 3i as the parameter for trending,inflation,acceptance and so on. I am basically making the investors of those films act as if they are investors of 3i.

Financials of 3i: (All figures are in cr )

Investment

Rs. 65.00
IndianRs. 111.10
OverseasRs. 35.00
Rs. 146.10
Cost of capital25%
Traditional Net Income
RevenueRs. 146.10
TotalRs. 146.10
Deduct investmentRs. 65.00    Return on Capital124.77%
Net IncomeRs. 81.10
  EVA
Market Value of CapitalRs. 65.00
 x Cost of Capital25%
Cost of Capital at Market ValueRs. 16.25
Net IncomeRs. 81.10
 – Cost of CapitalRs. 16.25
Economic Value AddedRs. 64.85

 ______________________________________________________________________

now, 25% will be taken as the cost of capital .By definition,if EVA is less than 1,it means the investment’s value is eroded.

Ek Tha Tiger:

InvestmentRs. 90.00
IndianRs. 110.00
OverseasRs. 25.00
Rs. 135.00
WACC25%
Traditional Net Income
RevenueRs. 135.00
TotalRs. 135.00
Deduct investmentRs. 90.00     Return on Capital50.00%
Net IncomeRs. 45.00
  EVA
Market Value of CapitalRs. 90.00
 x Cost of Capital25%
Cost of Capital at Market ValueRs. 22.50
Net IncomeRs. 45.00
 –  Cost of CapitalRs. 22.50
Economic Value AddedRs. 22.50 Value enhanced

_______________________________________________________________________

Rowdy Rathore:


CapitalRs. 75.00
IndianRs. 72.60
OverseasRs. 8.10
WACC25.00%
Traditional Net Income
RevenueRs. 80.70
IncomeRs. 80.70
Deduct capitalRs. 75.00      Return on Capital7.60%
Net IncomeRs. 5.70
  EVA
Capital employedRs. 75.00
 x Cost of Capital25.00%
Cost of Capital at Market ValueRs. 18.75
Net IncomeRs. 5.70
 –  Cost of CapitalRs. 18.75
Economic Value Added-Rs. 13.05Value eroded

_______________________________________________________________________

 

Agneepath


CapitalRs. 75.00
IndianRs. 67.65
OverseasRs. 14.85
WACC25.00%
Traditional Net Income
RevenueRs. 82.50
IncomeRs. 82.50
Deduct capitalRs. 75.00       Return on Capital10.00%
Net IncomeRs. 7.50
  EVA
Capital employedRs. 75.00
 x Cost of Capital25.00%
Cost of Capital at Market ValueRs. 18.75
Net IncomeRs. 7.50
 – Cost of CapitalRs. 18.75
Economic Value Added-Rs. 11.25Value eroded


__________________________________________________________________________


Barfi:


CapitalRs. 50.00
IndianRs. 50.40
OverseasRs. 13.50
WACC25.00%
Traditional Net Income
RevenueRs. 63.90
IncomeRs. 63.90
Deduct capitalRs. 50.00Return on Capital27.80%
Net IncomeRs. 13.90
  EVA
Capital employedRs. 50.00
 x Cost of Capital25.00%
Cost of Capital at Market ValueRs. 12.50
Net IncomeRs. 13.90
 –  Cost of CapitalRs. 12.50
Economic Value AddedRs. 1.40 Value enhanced

 

Tags:
23 Comments
  1. hithere 7 years ago

    Lag raha hai MBA ki basic Finance ki classes chal rahi hai 🙂

    • Baba Ji 7 years ago

      LOL! apni padhayi ki age gayi hithere ji. This is just for trial basis.what do you think of it? 😀

  2. sunil 7 years ago

    WACC is 25% for all films?What is WACC?

    • Baba Ji 7 years ago

      it is weighted average cost of capital by definition but in our case,it can just be called cost of capital or expected rate of return for investor.

  3. rajesh 7 years ago

    Have you considered time span also while calculating cost of capital at 25%.

    • Baba Ji 7 years ago

      time span is nearly same for the movies i took because all took similar time for making. the best thing i saw in eva is it takes cares of trending,inflation,roi all at once.

  4. FS 7 years ago

    I understood your theory but the numbers are going over my head. May be you should have written the figures before going in for calculation.

    PS: This is an applied theory in your profession if I am not wrong especially for M&A.

    • Baba Ji 7 years ago

      I have taken distributor shares in india and overseas. neglected non theatrical revenues to make the calculation simpler and more accurate.

      • Baba Ji 7 years ago

        its a practical method used in many companies.In India companies like NIIT, Godrej group and TCS have implemented EVA as a performance measurement system. EVA implementation helped Godrej group in segregating the entire business into several units to see which of them are creating EVA or not. A number of companies like Infosys, Satyam, Dr. Reddy’s laboratories, Hindustan lever report EVA as additional information in their annual reports.

  5. sputnik 7 years ago

    Good post Baba. This theory will take care of inflation for sure. Using 3I which did exceptionally well at the BO as base is not right though. May be Bodyguard/Dabangg can be used as base.

    • Baba Ji 7 years ago

      Thanks sputnik. BG didnt trend well. It is said that dabang didnt maximise its potential.

  6. Ritz 7 years ago

    @Baba

    So EVA is distribution based verdit ? How to differentiate between a producers distributed film (producers themselves distribute and high profit sans also actor’s fees) And a case where producer makes good profit but distributors dont?

    • Ritz 7 years ago

      Also, some major stars now not charging directly but claiming a share in profit , while some stars still do charge upfront. How to account for that here?

      • Baba Ji 7 years ago

        When BOI or taran give cost figures ,it includes actors fees unless they mention it specifically. Regarding profit sharing, we will have to subtract the amount from the nett figures.In 3i case above, I havent accounted aamirs fees bcos i dont know how much profit share he took. the EVA value will go down if i do that.

        • sputnik 7 years ago

          There were reports that Aamir, Raju Hirani and Vidhu Vinod Chopra shared the profits equally. If that’s the case then you would have to subtract Raju Hirani’s profits from the nett too coz he did not take any free upfront either. That way EVA will do down even more.

    • Baba Ji 7 years ago

      EVA is a verdict based on investors expectation. If the film is sold to corporate,then it will be from the perspective of the corporate. If its not,then from the perspective of producer.

      • Ritz 7 years ago

        Corporates dont buy all rights. Only theatrical ones.

        In that case deduct satellite,music,dvd for films which distributed themselves by producers.

        • Ritz 7 years ago

          hmm, u havent taken it into account anyways.
          (music,satellite)

        • Baba Ji 7 years ago

          agreed. I had told this to sputnik somewhere that why do trade analysts add tv/music rights to distributors profits? thanks for the suggestions.

          • Bored 7 years ago

            Because studio acquisitions include all ancillary revenues.

  7. Ritz 7 years ago

    So I am waiting for EVA report on major films of 2012. When is it coming Baba? 😀

    Also wud be better if u mention actor remuneration part explicitly for wherever applicable as mentioned earlier. Thanks.

    • Baba Ji 7 years ago

      ritz , i have taken an unofficial break from BO posts. I was terribly bored in making this post itself.It was taking too much time and attention.Though its on the right track, its a half baked post itself and i was expecting ppl to give me feedback but most ppl got afraid of the balance sheet -like-look of it. good that you ,sputnik and few others cared to read and understand it.I may make some post in future when i get some patience for it.Thanks for the interest 😀

      • Ritz 7 years ago

        Well, ok. Dont give up completely – i like the fact that its completely theatrical performance based. Keep at it and post whenever you have something. Thx

Leave a reply

Log in with your credentials

or    

Forgot your details?

Create Account