Comparing ROA and EVA
General Motors's CFO,Michael Losh,converted GM's performance measure for compensation from net income to ROA.In explaining the move in CFO (August 1996),he said,"ROA was a logical next step because all those other measures generally have focused on the income statement.Moving to ROA means that we're going to focus not only on the income statement,but on the balance sheet and effective utilization of the assets and liabilities that are on the balance sheet as well.
"ROA is a better measure for us than EVA.… EVA is simpler conceptually,because it automatically builds on growth,whereas with this approach we know that we've got to have growth as an overlying objective.… EVA is more comprehensive.And that has a certain appeal to me.But,given our situation,particularly in our North American operations,it just would not have been the right measure.
"ROA works for us and EVA doesn't because our operations have to deal with those two different kinds of starting points.Within GM,in our North American operations,you've got a classic turnaround situation,and in our international operations,you've got a classic growth situation.You can apply ROA to both;you can't apply EVA to both."
Required:
a.Explain how ROA focuses on both the income statement and the balance sheet.
b.Explain why EVA is more "comprehensive" than ROA.
c.Do you agree with Losh's statement that "you can apply ROA to both;you can't apply EVA to both"? Explain.

Question

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The Answer of Comparing ROA and EVA
General Motors's CFO,Michael Losh,converted GM's performance measure for compensation from net income to ROA.In explaining the move in CFO (August 1996),he said,"ROA was a logical next step because all those other measures generally have focused on the income statement.Moving to ROA means that we're going to focus not only on the income statement,but on the balance sheet and effective utilization of the assets and liabilities that are on the balance sheet as well.
"ROA is a better measure for us than EVA.… EVA is simpler conceptually,because it automatically builds on growth,whereas with this approach we know that we've got to have growth as an overlying objective.… EVA is more comprehensive.And that has a certain appeal to me.But,given our situation,particularly in our North American operations,it just would not have been the right measure.
"ROA works for us and EVA doesn't because our operations have to deal with those two different kinds of starting points.Within GM,in our North American operations,you've got a classic turnaround situation,and in our international operations,you've got a classic growth situation.You can apply ROA to both;you can't apply EVA to both."
Required:
a.Explain how ROA focuses on both the income statement and the balance sheet.
b.Explain why EVA is more "comprehensive" than ROA.
c.Do you agree with Losh's statement that "you can apply ROA to both;you can't apply EVA to both"? Explain.