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Authors:
Vibha Tripathi (Ahmedabad University)
Published in:
2021
Revision date:
23-Feb-2021
Length:
14 pages
Data source:
Published sources

Abstract

In January 2020, Mr Kaul who worked as a finance executive in a credit rating firm in USA was assigned the task of analysing Alphabet Inc from 2015 to 2019 as a part of routine analysis. The firm rated the companies by assessing their ability to pay the debts and examine their financial stability. Till date, the firm had relied on traditional measures to evaluate a company but now the firm wanted to depart from the accounting profit measures, which is why Mr Kaul decided to emphasize the economic profit angle comprising of Economic Profit Margin (EPM), Economic Spread Ratio (ESR) and Market Value Added (MVA). The case narrates the initial dilemma faced by Mr Kaul for the relevance of Economic Value Added (Economic Profits) as a performance measure and how his former colleague helped him with the concept and applicability of EVA. The case analysis surfaces as Mr Kaul, a financial enthusiast explored all possible angles of EVA like EPM, ESR, MVA, and EV for Alphabet Inc. The case prompts the students to decide and interpret how Alphabet Inc emerged as a value creator with a strong MVA and maintained an enviable economic spread ratio against the competitor companies like Adobe Inc, Autodesk Inc, Facebook Inc, International Business Machines Corp, Intuit Inc, Microsoft Corp, Oracle Corp, Salesforce.com Inc, and Service Now Inc. It also leaves scope for the students to decipher why few companies showed positive ROCE but a low EVA. Students can also suggest ways to improve EVA by making certain accounting adjustments as suggested by Stern Stewart and Company. It persuades them to differentiate between traditional and contemporary measures of performance.

Teaching and learning

This item is suitable for undergraduate and postgraduate courses.

Topics

Economic value added (EVA) analysis; Performance analysis; Enterprise value; Market value added; Return on capital employed (ROCE); Economic profit analysis; Net profit; CAPM (capital asset pricing model); Residual income; Cost of capital

Setting

The events covered by this item took place in 2015 to 2019.

Geographical setting

Region:
Americas
Country:
United States

Featured company

Company name:
Alphabet Inc
Employees:
10000+
Turnover:
USD 46.02 billion
Type:
Public company
Industry:
Computer and information technology

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