Analysis of the predictive ability of the components of economic value added in predicting next period's operating profit: Evidence from Iran

Economic value added is a critical criterion in making financial decisions and investors have always been trying to make use of its ability in order to predict the profitability power of companies. This study aims to investigate the predictive ability of the components of economic value added in predicting next period’s operating profit in companies accepted in Tehran Stock Exchange. In order to do this, 119 companies were selected among the population whose necessary information in the specified six-year period (87 - 82) was available. After that, information related to four independent variables was studied. The subsequent period’s operating profit was considered as the dependent variable. Simple regression was chosen as the statistical technique to test the hypothesis. Correlation test of hypotheses was taken according to Pierson’s method. The results show that the operating profit after tax, capital amount and return on assets have the ability of predicting subsequent period’s operating profit; however, the ability of operating profit after tax is more than others.   Key words: Economic value added, return on assets, cost of capital, capital employed, net operating profit after taxes, next period’s operating profit.