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EVA appears to be a very important, only?, criteria for investing our money in a company. I would like to understand EVA better and I hope this post helps to generate further discussion and understanding of this concept.

EVA is the measure of a company's ability to generate value above that which an investor can expect to receive from less risky investments, e.g., 30 year Treasury bonds, S&P 500 index. A company's EVA can be shown on a Competitive Advantage Gap (GAP) and Competitive Advantage Period (CAP) chart, with GAP (returns) on the Y-axis and CAP (time) on the X-axis.

The GAP/CAP chart displays the projected company's market capitalization over time with future values discounted to their present values. From page 100 in the revised GG book, the theme of this chart is earning the right to an investor's capital.

The market tends to reward companies that have consistently strong up-side revenues/sales (returns) and no perceived viable competition (time) with increasingly larger market caps and high Price/Sales (Market Cap/Total Sales for last 12 months) ratios.

For me, GAP is easier to understand and monitor. For example; the continuing 100%+ sales increases year-to-year by JDSU of its products and its improving Gross Margins are reported every quarter and it is easy to see why the market normally rewards the company - and its investors - with increasing market caps. OK, OK, There are those notable exceptions when the market becomes even more manic-depressive than normal, like now.

On the other hand; CAP is easy to understand but confusing and difficult to monitor. Understanding, at least conceptually, is easy - Is there a viable existing competitor or one looming on the horizon? What makes if difficult to monitor is all the dis-information available. Digressing for a moment - If you ask Larry Ellison, there is a viable competitor for almost anything (Internet, CRM, B2B, etc.) - Oracle.

This may be one of the reasons the market feels more comfortable expanding a company's GAP than expanding its CAP.

None of the above has yet differentiated between the high tech GG companies and any other companies thus far.

Harold
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