In shareholders meeting, question has been raised on various strategic decisions made by the management. Representations by management indicated the…

7 Analysis The Economic Value Added (EVA) of 445.96 lakhs clearly indicates that the company is generating returns in excess of its overall cost of capital, thus creating substantial value for its shareholders. This outcome is underpinned by strong operating performance and prudent financial structuring. The Net Operating Profit After Tax (NOPAT) of 650lakhs has been derived from an EBIT of 724.29 lakhs, reflecting effective cost management in core operations, including control over raw material costs and overheads. Key adjustments—such as adding back non-cash items like depreciation and adjusting for provisions—ensure a true reflection of operating profitability. The tax impact has been optimized through application of the concessional rate under Section 115BAB (effective rate of 17.16%), enhancing post-tax returns. On the capital structure front, the company has a total capital employed of 2,100 lakhs, comprising - 1,800 lakhs in equity and 300lakhs in debt. The cost of equity (9%) and after-tax cost of debt [15% × (1 – 0.1716)] are appropriately weighted in the WACC calculation, resulting in a blended capital cost of 9.49%. The substantial spread between NOPAT (650lakhs) and the capital charge (₹ 204.04 lakhs) confirms that the company is not just accounting profitable but also economically profitable. EVA, by capturing the true cost of both debt and equity financing, acts as a superior metric of value creation. Overall, the company's financial strategy reflects sound operational efficiency, optimal capital allocation, and strong earnings quality. The positive EVA signals that management is deploying funds wisely, maintaining cost discipline, and delivering returns that exceed stakeholder expectations. Workings Effective tax rate (15% tax rate + 10% surcharge + 4% cess) u/s 115BAB = 17.16% Particulars Amount (₹ in lakhs) Net operating profit after tax (NOPAT) EBIT 724.29 Less: Income Tax (15% + SC 10% + HEC 4%=17.16%) 124.29 EBT 600.00 Add: Non- Cash Expenses 50.00 Net-operating Profit After Tax (NOPAT) 650.00 Finding out the Invested Capital Total Assets 2,500.00 Less: Non-Interest Bearing Liabilities 400.00 Capital Employed 2,100.00 Add: Non-cash Adjustment 50.00 Adjusted Capital Employed / Invested Capital 2,150.00 Computation of WACC WACC = Cost of Equity + Cost of Debt In this case, WACC 9.49% = (1,800/2,100 × 9%) + {(300/2,100 × 15% (1 - 0.1716)} Capital Charge 204.04 = Invested Capital × WACC = 2,150 × 9.49% EVA 445.96 = Adjusted NOPAT- Capital Charge = (650-204.04) Alternative Presentation EVA = NOPAT – WACC × Capital Employed Capital Employed = 1,500 +300 +300 = 2,100 Lakhs NOPAT = (PBIT - Interest -Tax) + Interest (net of tax) Particulars Amount (₹ in lakhs) EBIT 724.29 Less: Interest 100.00 EBT 624.29 Less: Tax 107.13 PAT 517.16 Add: Interest (net of tax) 82.84 Add: Non- cash expenses 50.00 NOPAT 650.00 Computation of Adjusted Capital Employed Particulars Amount (₹ in lakhs) Capital Employed 2,100 Add: Non-cash adjustment 50 Adjusted Capital Employed 2,150 WACC = (1,500 + 300)/ 2,100 × 9% + 300/ 2,100 × 15% (1-0.1716) = 9.49% EVA = NOPAT - (WACC × Adjusted Capital Employed) = 650 - (9.49% × 2,150) = 650 - 204.04 = 445.96 Lakhs Alternative Solution Analysis The Economic Value Added (EVA) of 425.84 lakhs clearly indicates that the company is generating returns in excess of its overall cost of capital, thus creating substantial value for its shareholders. This outcome is underpinned by strong operating performance and prudent financial structuring. The Net Operating Profit After Tax (NOPAT) of 629.88 lakhs has been derived from an EBT of 600lakhs, reflecting effective cost management in core operations, including control over raw material costs and overheads. Key adjustments—such as adding back non-cash items like depreciation and adjusting for provisions—ensure a true reflection of operating profitability. The tax impact has been optimized through application of the concessional rate under Section 115BAB (effective rate of 17.16%), enhancing post-tax returns. On the capital structure front, the company has a total capital employed of 2,100 lakhs, comprising - 1,800 lakhs in equity and 300lakhs in debt. The cost of equity (9%) and after-tax cost of debt [15% × (1 – 0.1716)] are appropriately weighted in the WACC calculation, resulting in a blended capital cost of 9.49%. The substantial spread between NOPAT (₹ 629.88 lakhs) and the capital charge (₹ 204.04 lakhs) confirms that the company is not just accounting profitable but also economically profitable. EVA, by capturing the true cost of both debt and equity financing, acts as a superior metric of value creation. Overall, the company's financial strategy reflects sound operational efficiency, optimal capital allocation, and strong earnings quality. The positive EVA signals that management is deploying funds wisely, maintaining cost discipline, and delivering returns that exceed stakeholder expectations. Workings EVA = NOPAT – WACC × Capital Employed Capital Employed = 1,500 +300 +300 = 2,100 Lakhs NOPAT = (PBIT - Interest –Tax) + Interest (net of tax) Particulars Amount (₹ in lakhs) EBT 600.00 Less: Tax 102.96 PAT 497.04 Add: Interest (net of tax) 82.84 Add: Non- cash expenses 50.00 NOPAT 629.88 Computation of Adjusted Capital Employed Particulars Amount (₹ in lakhs) Capital Employed 2,100 Add: Non-cash adjustment 50 Adjusted Capital Employed 2,150 WACC = (1,500 + 300)/2,100 × 9% + 300/2,100 × 15% (1-0.1716) = 9.49% EVA = NOPAT – (WACC x Adjusted Capital Employed) = 629.88 - (9.49% × 2,150) = 629.88 - 204.04 = 425.84 Lakhs