Economic Value Added Momentum & Traditional Profitability Measures (ROA, ROE & ROCE): A Comparative Study

Abstract

To examine and provide empirical evidence about the Economic Value Added Momentum’ comparison with other traditional financial measures with respect to working capital management, we examined the relationship by analyzing the data collected from a sample of 69 non-financial sector firms listed with Pakistan Stock exchange for a period of 11 years (2007-2017). Secondary data is used available on the SBP website and verified with the consolidated financial statements of the firms. Hypothesis have been tested that EVAM (Economic Value Added Momentum) is more highly associated with the value of non-financial firms than other traditional performance measures with respect to working capital management. The purpose of the study is to provide empirical evidence on the relative and incremental information content of EVAM and other traditional measures, Return on Assets (ROA), Return on equity (ROE) and Return on Capital Employed (ROCE) with respect to working capital management (measured by CCC). Statistical tools regression analysis is used for the analysis. F-statistic, T-statistic and respective Beta coefficients are take into consideration to check to superiority of the EVM. The results are robust to the presence of endogeneity, demonstrate that that there is a significant relationship between Working capital management  and the firm’s Economic Value Added Momentum, and managers can create value by reducing their firm’s cash conversion cycle. It has been proved from the overall analysis that EVAM is more superior to other traditional financial performance measures in relations with working capital management.