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Authentic EVA Scenarios

A 100% authentic example from one of CDI Global’s sold companies taken from the book is shown in the table below. The table shows what the market value of the company’s equity capital was, when it went on sale, i.e. in the scenario 1 Norm case scenario.
The market value of the equity capital for all 10 scenarios is shown both inclusive and exclusive the terminal value. Shown in the other 9 scenarios is what the market value would be if each individual scenario was implemented in the company.
At the counting of the value creation in each scenario, it can be seen that the market value of the equity capital would be more than doubled if all the scenarios were implemented. The shown scenarios are just a small part of the principally infinite number of scenarios that can be derived and implemented.
Scenario no.

Changes compared to the NORM case scenario

Equity capital market value Mill. DKK

Exsl. term. value Incl. term. value
Norm 1 76.860 123.721
 2 Implementation of productivity improving initiatives resulting in a 1% point lower growth in the variable costs 96.581 174.953
 3 Reduction of the capacity costs corresponding to a 1% point lower growth therein 77.693 122.509
 4 Implementation of a new strategy resulting in a 1% point higher growth in the turnover without cost increases 103.696 196.090
 5 Implementation of a new strategy resulting in a 1% point higher growth in the turnover, but with variable costs that increase by ½% points less than the growth in the turnover 92.838 167.412
 6 The length of stay for stocks on hand is halved to 55 days => a doubling of the turnover rate to 6.5 88.700 138.406
 7 The debtors’ fixed time of credit decreases by 10 days to a turnover rate of 18 80.300 127.977
 8 The creditors’ fixed time of credit increased by 30 days to 70 days 83.318 131.731
 9 Implementation of risk reducing measures so that the investors’ required yield of return, WACC, decreases by 3% points 89.137 187.166
10 Investment in a production robot at the cost of DKK 5 mill. at the beginning of 2013 resulting in a reduction of production wages in 2013 corresponding to 6 people (DKK 3 mill.) and otherwise everything else being equal in relation to scenario 1 90.901 152.725

The table illustrates among other things:

  • That CDI Global can derive and quantify the key value drivers for any business.
  • That CDI Global can contribute to the implementation of the derived value drivers in the company ensuring that the value creation is realized.
  • That CDI Global can quantify ROC (= Return Of Consulting) for its customers.
  • That CDI’s clients can consider a fee payment to CDI as an investment, which is 100% guaranteed to be repaid many times over.
  • That a consulting fee of e.g. a few hundred thousand DKK in this specific example will be “paid back” several hundred times.

The companies, which have proven to be best at value creation are the so-called capital funds, PE firms and Value Invest Unit Trusts. What they do is exactly what is depicted on this website and in the book. CDI Global believes that company owners should do the same rather than having to sell their companies “too cheaply” to buyers, who then subsequently can realize the value creation. However, as a company owner, you must start your value creation activities in good time, i.e. 3 – 5 years before you actually intend to sell the company.

At the same time, until you want to sell your company, you receive on-going updated valuations of the market value of your company’s equity capital on terms completely as if it were listed, and you can regularly see how the market value develops as you implement the derived value drivers.

There are many “traps” in the practice of value creation. Most believe and have heard that growth is good. However growth in turnover and earnings is only good when ROIC is higher than WACC because then the company is creating a positive EVA. Therefore, the growth rate functions as an accelerator for the positive value creation. On the other hand, if ROIC is less than WACC, so that the company generates negative EVA, the growth rate works as an accelerator of the market value-based destruction of the equity capital.

Most also believe that value creation is automatically performed by “good” accounting results and high ROE´s. However, there is absolutely no automatic process in this. Even an abnormally high ROE of for example 37% may very well also conceal a market value-based destruction of the company’s equity capital.

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