Volume : 3 | Issue : 1 | Jan 2014 ISSN - 2250-1991 Research Paper Commerce Analysis of Financial Performance Using Market Value Added Approach * Dr.K.NIRMAL KUMAR REDDY t * Department of Commerce, SV University, Tirupathi. ABSTRACT Market Value Added Approach to the mix of various components in the Financial Performance. The present paper is an attempt to study Financial performance using and its impact on Market Value Added Approach in select software companies in South India. In South India there are 20 software companies that are listed in Bombay Stock exchange. Out of these 10 companies were purposively chosen to study the Market value Added of the individual companies and its impact on Market Value Added of the said companies. The companies selected are HEXAWARE TECHNOLOGIES LTD, MICRO TECHNOLOGIES (INDIA) LTD, KPIT CUMMINS INFOSYSTEMS LIMITED, ZENSAR TECH, INFOTECH ENTERPRISES LTD, CMC LTD, WIPRO LTD, TATA ELXSI, POLARIS LAB LTD, and FINANCIAL TECHNOLOGIES (INDIA) LTD for a period of ten years from 2002 to 2011. The MVA and seven independent variables were calculated for all the companies. MVA refers to the value added to the share holders’ wealth by the firm. If MVA is positive, it implies that the firm added value to the shareholders’ wealth. If negative it indicates that the firm is destroying the shareholders’ wealth. The MVA is positive in the case of all the companies is good. So the performance of these companies is satisfactory Keywords : 1. INTRODUCTION its market capitalization. The book value of the firm is equity One of the external indicators that gives the utmost satisfac- share capital plus reserves and surplus, minus any revalua- tion to the investors is share price and, truly speaking, the tion reserve and miscellaneous expenses. Market value of Market Value Added. From the investors’ view point, the in- the firm can be determined dividing Earning Before Interest vestor is always interested in increase in the share prices. The and Taxes (EBIT) by weighted average cost of capital. most reliable measure of management’s long – run success in adding value is known as “Market Value Added” (MVA). Market value Added = Market value of the firm- MVP is the difference between company’s current market Book value of the firm value as determined by its stock price and economic book value. Economic value of the company can be determined EBIT as the amount of capital that shareholders have committed Market value of the firm = ---------- to the firm throughout its existence, including earnings that Ko have been retained in the business. MVA is the best external performance measure as it indicates the market assessment Where Ko = Weighted Average Cost of Capital. of the effectiveness with which a company’s managers have used the scarce resources under their control. Hence, it is Book value of the firm = Equity share capital + Reserves and very significant and important to analyze and identify the in- surplus – Revaluation reserves – mi ternal indicators that are related to with Market Value Added. cellaneous expenses. 1.1 MARKET VALUE ADDED APPROACH 1.1.2 Return on Net worth The present study is undertaken to examine the effect of se- It can be derived by profit after taxes (PAT) minus preference lected variables on MVA. Thus, the objective of the study is share dividend divided by average net worth. to know one of the internal measures, which can influence the MVA. Here, MVA is taken as a dependent variable and the PAT – Preference share dividend seven other variables are selected as independent variables. RONW = ----------------------------------------------- The independent variables chosen in this study are: Average Net worth Return on Net Worth 1.1.3 Capital Productivity Capital productivity Value added is net sales plus changes in stocks minus raw Earnings Per Share material consumed and power and fuel cost. Capital is treat- Economic Value Added ed as net fixed assets. This is considering the fact that effi- Return on Sales cient utilization of assets is the sine qua non for improving the Return on Total Assets. productivity. Thus Cash Profit. Value added One year period has been taken i.e. from 01-04-2010 to 31- Capital productivity = ------------------- 03-2011, for computing the above variables and also for anal- Capital ysis. A brief description of each variable is given below. 1.1.4 Earning Per Share 1.1.1 Market Value Added (MVA) It can be derived by dividing net profit after taxes and prefer- MVA is derived by deduction the book value of the firm from ence dividend by the number of common shares i.e., 141 X PARIPEX - INDIAN JOURNAL OF RESEARCH Volume : 3 | Issue : 1 | Jan 2014 ISSN - 2250-1991 (EBIT – I) (1 - t) – PD and debt. WACC is the combination of cost of equity, cost of EPS = -------------------------------- preference share capital and cost of debt. N 1.1.6 Return on Sales Where, PBIT Return on sales = ------------- EBIT = Profit before interest and taxes Sales I = Interest t = Tax rate 1.1.7 Return on Total Assets PD = Preference dividend This gives productivity of all taken together. This is consid- N = Number of Common Shares outstanding ered on after tax basis. 1.1.5 Economic Value Added (EVA) PBIT – Tax provision For the purpose of analysis, EVA is derived as follows: Return on Total Assets = -------------------------------------- Total Assets EVA = (r – c) x Invested capital 1.1.8 Cash Profit Cash profit is derived as profit after taxes plus depreciation NOPAT Cost of capital plus expenses amortized. r = -------------------------, c = --------------------- Invested capital Invested capital The results of the MVA and other seven independent varia- bles for select software Companies in south India as on 31- For derivation of Weighted Average Cost of Capital (WACC), 03-2011 are presented in Table 1.1. invested capital is divided into three parts, equity, preference 1.1 MARKET VALUE ADDED AND OTHER INDEPENDENT VARIABLES OF SELECT SOFTWARE COMPANIES AS ON 31-03-2011 S.NO. ITEMS HEXAWARE MICRO KPIT ZENSAR INFOTECH CMC WIPRO TATA POLARIS FINANCE 1 MVA* 3197.5 1104 8302.5 1478.5 3116 20695.5 23815 2441 3677 43245 2 RONW 0.42 0.27 0.24 0.4 0.22 0.7 0.41 0.17 0.06 -0.27 3 CAP 2.56 1.79 2.41 2.08 1.9 6.26 3.12 2.48 2.36 0.8 4 EPS 9.13 57.71 11.78 30.47 12.56 118.42 21.72 10.44 20.43 29.69 5 EVA* 4.16 0.27 0.67 0.45 2.19 11.22 0.91 0.41 3.48 -0.19 6 ROS 0.21 0.17 0.11 0.13 0.13 0.19 0.2 0.08 0.02 -0.54 7 ROTA 0.43 0.24 0.21 0.21 0.19 0.91 0.62 0.25 -0.02 -0.48 8 C P* 0.2 0.22 0.13 0.14 0.15 0.18 0.2 0.12 0.19 -0.41 Rupees in Crores. Source: Compiled from the annual reports of sample It is inferred from the above analysis that seven variables like companies. RONW, CAP, EPS, EVA, ROS, ROTA and Cash Profit are The Market Value Added (MVA) and other seven independent found to have significant effect on MVA. variables such as Return on Net worth (RONW), Capital Produc- tivity (CAP), Earning Per Share (EPS), Economic Value Added Further, an attempt is also made to examine the relative finan- (EVA), Return On Sales (ROS), Return On Total Assets (ROTA) cial performance of select software companies in south India and Cash Profit (CP) of all the companies are calculated. for the period of ten years from 2001-02 to 2010-11 in terms of profitability, leverage and liquidity. The data has been se- Market value added refers to the value added to the share lected from Annual Reports of select Software companies in holders’ wealth by the firm for the period 31-03-2011. If market South India. The following twenty two financial ratios have value added is positive, it implies that the firm added value to been used as variables or inputs in the analysis. the shareholders’ wealth. If market value is negative, it indi- cates that the firm is destroying the shareholders’ wealth. The market value added is positive in the case of all the compa- nies. Therefore, the performance of all the companies is good. Hence, the performance of all companies is satisfactory. Regressions are run of MVA on seven variables mentioned above individually to examine the effect of each variable on MVA. The results are shown in Table 1.2. Table 1.2 REGRESSIONS OF MVA ON SELECT INDE- PENDENT VARIABLES S.No. Variable R R2 t- value 1. Return on Net Worth 0.311 0.009 -0.09* 2. Capital Productivity 0.034 0.0012 0.092* 3. Earning per share 0.211 0.044 0.571* 4. Economic Value Added 0.968 0.0093 0.257* 5. Return on Sales 0.697 0.487 -2.578* 6. Return on Total Assets 0.207 0.043 -0.562* 7. Cash Profits 0.765 0.586 -3.148* NS : Not Significant * Significant at 1 % level. ** Significant at 5 % level. 142 X PARIPEX - INDIAN JOURNAL OF RESEARCH Volume : 3 | Issue : 1 | Jan 2014 ISSN - 2250-1991 software company separately. The average ratios of ten soft- ware companies in south India are shown in Table 1.3. Gross profit ratio is the ratio of gross profit to net sales and expressed as a percentage. It reveals the amount of gross profit for each rupee of sale. The higher the ratio, the greater will be the margin.