The first and foremost measure of performance that comes to oneβs 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 | ||
Indian | Rs. 111.10 | ||
Overseas | Rs. 35.00 | ||
Rs. 146.10 | |||
Cost of capital | 25% | ||
Traditional Net Income | |||
Revenue | Rs. 146.10 | ||
Total | Rs. 146.10 | ||
Deduct investment | Rs. 65.00 | Β Β Return on Capital | 124.77% |
Net Income | Rs. 81.10 | ||
Β EVA | |||
Market Value of Capital | Rs. 65.00 | ||
Β x Cost of Capital | 25% | ||
Cost of Capital at Market Value | Rs. 16.25 | ||
Net Income | Rs. 81.10 | ||
Β – Cost of Capital | Rs. 16.25 | ||
Economic Value Added | Rs. 64.85 | ||
Β ______________________________________________________________________
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:
Investment | Rs. 90.00 | ||
Indian | Rs. 110.00 | ||
Overseas | Rs. 25.00 | ||
Rs. 135.00 | |||
WACC | 25% | ||
Traditional Net Income | |||
Revenue | Rs. 135.00 | ||
Total | Rs. 135.00 | ||
Deduct investment | Rs. 90.00 | Β Β Β Return on Capital | 50.00% |
Net Income | Rs. 45.00 | ||
Β EVA | |||
Market Value of Capital | Rs. 90.00 | ||
Β x Cost of Capital | 25% | ||
Cost of Capital at Market Value | Rs. 22.50 | ||
Net Income | Rs. 45.00 | ||
Β –Β Cost of Capital | Rs. 22.50 | ||
Economic Value Added | Rs. 22.50 | Β Value enhanced |
_______________________________________________________________________
Rowdy Rathore:
Capital | Rs. 75.00 | ||
Indian | Rs. 72.60 | ||
Overseas | Rs. 8.10 | ||
WACC | 25.00% | ||
Traditional Net Income | |||
Revenue | Rs. 80.70 | ||
Income | Rs. 80.70 | ||
Deduct capital | Rs. 75.00 | Β Β Β Return on Capital | 7.60% |
Net Income | Rs. 5.70 | ||
Β EVA | |||
Capital employed | Rs. 75.00 | ||
Β x Cost of Capital | 25.00% | ||
Cost of Capital at Market Value | Rs. 18.75 | ||
Net Income | Rs. 5.70 | ||
Β –Β Cost of Capital | Rs. 18.75 | ||
Economic Value Added | -Rs. 13.05 | Value eroded | |
_______________________________________________________________________
Agneepath
Capital | Rs. 75.00 | ||
Indian | Rs. 67.65 | ||
Overseas | Rs. 14.85 | ||
WACC | 25.00% | ||
Traditional Net Income | |||
Revenue | Rs. 82.50 | ||
Income | Rs. 82.50 | ||
Deduct capital | Rs. 75.00 | Β Β Β Β Return on Capital | 10.00% |
Net Income | Rs. 7.50 | ||
Β EVA | |||
Capital employed | Rs. 75.00 | ||
Β x Cost of Capital | 25.00% | ||
Cost of Capital at Market Value | Rs. 18.75 | ||
Net Income | Rs. 7.50 | ||
Β – Cost of Capital | Rs. 18.75 | ||
Economic Value Added | -Rs. 11.25 | Value eroded |
__________________________________________________________________________
Barfi:
Capital | Rs. 50.00 | ||
Indian | Rs. 50.40 | ||
Overseas | Rs. 13.50 | ||
WACC | 25.00% | ||
Traditional Net Income | |||
Revenue | Rs. 63.90 | ||
Income | Rs. 63.90 | ||
Deduct capital | Rs. 50.00 | Return on Capital | 27.80% |
Net Income | Rs. 13.90 | ||
Β EVA | |||
Capital employed | Rs. 50.00 | ||
Β x Cost of Capital | 25.00% | ||
Cost of Capital at Market Value | Rs. 12.50 | ||
Net Income | Rs. 13.90 | ||
Β –Β Cost of Capital | Rs. 12.50 | ||
Economic Value Added | Rs. 1.40 | Β Value enhanced |
Tags: Agneepath Ek Tha Tiger Rowdy Rathore Three Idiots
Lag raha hai MBA ki basic Finance ki classes chal rahi hai π
LOL! apni padhayi ki age gayi hithere ji. This is just for trial basis.what do you think of it? π
WACC is 25% for all films?What is WACC?
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.
Have you considered time span also while calculating cost of capital at 25%.
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.
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.
I have taken distributor shares in india and overseas. neglected non theatrical revenues to make the calculation simpler and more accurate.
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. Reddyβs laboratories, Hindustan lever report EVA as additional information in their annual reports.
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.
Thanks sputnik. BG didnt trend well. It is said that dabang didnt maximise its potential.
@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?
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?
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.
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.
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.
Corporates dont buy all rights. Only theatrical ones.
In that case deduct satellite,music,dvd for films which distributed themselves by producers.
hmm, u havent taken it into account anyways.
(music,satellite)
agreed. I had told this to sputnik somewhere that why do trade analysts add tv/music rights to distributors profits? thanks for the suggestions.
Because studio acquisitions include all ancillary revenues.
So I am waiting for EVA report on major films of 2012. When is it coming Baba? π
Also wud be better if u mention actor remuneration part explicitly for wherever applicable as mentioned earlier. Thanks.
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 π
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