Godrej Consumer Products Limited - Implementing EVA

On June 18, 2001, GCPL was listed on the BSE quoting at Rs 48.50 while GIL traded at Rs 16. By August 2002, the share price of GCPL rose to Rs. 120 while that of GIL remained stagnant at Rs. 20 (Refer Exhibit I). Analysts said that this vast difference in share prices showed investors' perceived value of the two companies.

GCPL was outperforming GIL not only on the stock exchanges but also reporting better financial performance (Refer Table IV). With the significant rise in share prices of GCPL, the shareholders of the company were delighted. As GSL was a closely held company, the biggest shareholders were the promoters themselves...

EVA measured whether the post tax operating profit of a company was enough to cover its cost of capital.

Unlike the traditional methods of accounting profit, where only cost of debt was deducted, EVA took into account the cost of equity also. Therefore, EVA tried to capture the true economic profit of an enterprise. EVA was more directly linked to the creation of shareholder wealth over time.

It could be calculated as net operating profit minus an appropriate charge for the opportunity cost of all capital invested in an enterprise...