EVA Management

We use Economic Value Added (EVA®) as principal management metric. Continuously increasing EVA leads to greater corporate value, and corresponds not only to long-term benefit for shareholders but also for all of our stakeholders. The concept of “maximum with minimum” that we present in the K27 in fact represents the approach of EVA management. EVA could also be described as a metric that calculates how much true economic benefit is produced from invested capital. Management is always aware of invested capital since priority is given to obtaining profit in amounts exceeding the expected profit from the capital. The approach of “maximum with minimum” encompasses increasing Net Operating Profit After Tax (NOPAT) without increasing invested capital, through higher sales and reducing costs, and lowering cost of capital by, for example, improving our capital structure. This produces higher EVA and leads to enhancing corporate value. Although we have managed our businesses individually using numerical methods, we have not set target EVA values for each business, and instead use the EVA metric as a company-wide target. Our business divisions employ matrix management, where various functions including R&D, production and sales are encouraged to dynamically interact, while we manage capital efficiency as a single entity, because we believe this encourages proactive investments by business divisions and allows for flexible capital allocation according to the business circumstances. In K27, we will continue to use EVA a principal management metric while also implementing financial measures in anticipation of where the times are headed and continuing to innovate.

Figure showing EVA approach. EVA is the remaining profit after deducting capital costs used in corporate activities, which is considered to be profit directly linked to corporate value. Using the minimum resources (balance sheet perspective), we strive to earn maximum profit (income statement perspective) and increase corporate value.

Figure showing EVA formula: EVA = NOPAT – Cost of capital or EVA = (ROIC – Weighted average cost of capital) × Invested capital

Improvement and Trends in EVA

We strive to increase corporate value by measuring improvement of EVA from the following four perspectives.

Figure showing improvement in EVA. The first perspective is high-added-value investment. We invest in projects and businesses in which NOPAT during the plan period will exceed capital cost. This is a key point for sustainable profitable growth. The second perspective is profit improvement. NOPAT is increased without increasing invested capital. Sales growth, cost reductions and efficient management of expenses are key. The third perspective is resolution and collection. Invested capital is recovered from businesses and investments with negative EVA and poor prospects for improvement. The important thing is leaner capital. The fourth perspective is reduction of capital cost. Capital structure improvement (share repurchases), risk management and IR activities are key.

Bar graph showing trends in EVA. EVA continued its declining trend after peaking in FY2018, but increased 0.3 billion yen compared with the previous fiscal year to 14.9 billion yen in FY2023.

October 1998: Consulting by Stern Stewart & Co.* (first client in Japan)
April 1999: Started application of EVA

  • * Stern Stewart & Co.: Developed EVA in theory and applied it to corporate EVA management. Registered EVA as a trademark.
Page Top