What is EVA? Definition
Economic Value Added (EVA) is a financial performance method to calculate
the true economic profit of a corporation. EVA can be calculated as Net Operating
Profit After Tax minus a charge for the opportunity
cost of the capital invested.
EVA ( © / ™ Stern Stewart & Co.) is an estimate of the amount that earnings
differ from the required minimum rate of return (against comparable risk)
for shareholders or lenders. The difference can be both a surplus or a shortage.
EVA compared with MVA
Unlike Market-based measurements, such as MVA,
EVA can be calculated for a divisional (Strategic Business Unit) level.
Unlike Equities measurements, EVA is a flow and can be used for performance
evaluation over time.
EVA compared with EBIT and EPS
Unlike accounting profit, such as EBIT,
Net Income and EPS, EVA is economic and is
based on the idea that a company must cover both the operating costs AND the
capital costs.
Calculation of EVA. Formula
The basic formula for calculating EVA is:
Net Sales
- Operating Expenses
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Operating Profit (EBIT)
- Taxes
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Net Operating Profit After Tax (NOPAT)
- Capital Charges (Invested Capital x Cost of Capital)
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Economic Value Added (EVA)
By taking all capital costs into account, including the cost of equity,
EVA shows the financial amount of wealth a business has created or destroyed
in a reporting period. In other words, EVA is profit in the way that shareholders
define it. If the shareholders expect, say, a 10% return on their investment,
they earn money only to the extent that their share of the NOPAT exceeds 10%
of equity capital. Everything before that just builds up to the minimum acceptable
compensation for investing in a risky enterprise.
USAGE of the EVA method: Aligning decisions with shareholder wealth
EVA was developed to help managers to incorporate two basic principles
of finance into their decision making:
- The primary financial objective of any company should be to maximize
the wealth of its shareholders.
- The value of a company depends on the extent to which investors expect
that future profits will differ from the cost of capital. By definition,
a sustained increase in EVA will result in an increase in the market value
of a company. This approach has proved valid and effective for many types
of organizations. This is because the level of EVA isn't what really matters.
Current performance already is reflected in share prices. It is the (continuous)
improvement in EVA that brings (continuous) increases in shareholder
wealth.
Some specific usages of EVA include:
- To set organizational goals.
- Performance measurement.
- Determining of bonuses.
- Communication with shareholders and investors.
- Motivation of managers.
- Capital budgeting.
- Corporate valuation.
- Analyzing equities.
Book: S. David
Young, Stephen F. O'Byrne - EVA and Value-Based Management.. -
Book: Aswath Damodaran
- Investment Valuation: Tools and Techniques for Determining.. -
Book: James R.
Hitchner - Financial Valuation: Applications and Models -
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 What is EVA Momentum?
EVA Momentum is the change in a business's EVA divided by the prior period's sales (revenue). It was developed by Bennet Stewart of EVA Dimensions. It is an application of EVA that measures the EVA growth rate, scaled to the size of the company.
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How to Calculate EVA
Another way to describe how to calculate EVA:
Economic Value Added = NOPAT - Capital Charges
or
Economic Value Added = NOPAT - ( Invested Capital * WACC )
or
Ec...
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EVA Calculation across a Whole Value Chain
I request to all members to help me on how to go about an EVA calculation across the value chain from production down to consumption. What is important to keep in mind?...
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Calculating EVA for a Proprietary Company
EVA can be easily calculated when the organisation is Public Limited. But it is difficult to calculate EVA of a proprietary company as the cost of equity does not exist. Please advise me....
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EVA & Amortization of R&D
The amortization of R&D on straight line basis does not justify the concept of equal opportunity through out the life of amortization and it seems to be more biased towards the earlier years of product. We know that companies get maximum benefits fro...
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Alternative Methods for Economic Value Added (EVA)
Are there alternative methods for EVA? I am developing a research study, comparing some valuation methods. I am not concerned about asset valuation, but with value creation. I found TBR, only, does anyone know other ones? Thank you all....
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EVA growth is what matters
Improving EVA should be the goal of any major firm. After all, shareholders, who are providing the capital for the firm, have options to invest money elsewhere. To keep them onboard, managers must focus on growing the business when the returns...
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Economic Value Added Special Interest Group
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Economic Value Added Education & Events
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Weaknesses of EVA
Based on their findings from their survey of Fortune 1000 companies, Prakash Deo and Tarun Mukherjee summarized following weaknesses of EVA in below m...
Usage (application): Value Based Management
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Benefits of EVA
According to the article “How Fortune 1000 Firms View EVA” by Prakash Deo and Tarun Mukherjee (Corporate Finance Review, Sep/Oct 2009), EVA has follwi...
Usage (application): Value Based Management
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EVA Advantages
Economic Value Added has improved the corporate finance techniques and nowadays it represents the most modern management system based on
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EVA and Market Value
EVA has been pointed out as the most accurate management system focused on value creation. Unlike MVA, that is strongly link...
Usage (application): Management Control of Value Drivers.
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The Accounting Adjustments to EBIT Before Calculating EVA
In order to improve the measurement of Economic Value Added and to eliminate falsifications due to differences in the application of accounting standa...
Usage (application): Value Based Management, Economic Value Added
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EVA Adjustments
A major consideration in the application of EVA® is the adjustment of a large number of accounting variables ranging from accounting income and accoun...
Usage (application): EVA, Value Based Management
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Increasing and Measuring Value with EVA
Comprehensive presentation about the concept of EVA.
The most important points mentioned in this clear presentation which is even better understo...
Usage (application): Financial Accounting, Value Based Management, Economic Value Added
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EVA and Cash value added do NOT measure shareholder value creation
Pablo Fernandez analyzed 582 American companies using EVA, MVA, NOPAT and WACC data provided by Stern Stewart. For each of the 582 companies, we have ...
Usage (application): Measuring Value Creation
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Corporate Valuation for Businesses
Presentation that elaborates on corporate valuation, including the following sections:
1. Three types of value:
- Book Value
- Market V...
Usage (application): Corporate Valuation, Book Value, Market Value, Intrinsic Value, Fundamental Value, M&A, VBM, Fundamental Investing
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Optimal Capital Allocation Using RAROC and EVA
Equity capital allocation plays a particularly important role for financial institutions such as banks, who issue equity infrequently but have continu...
Usage (application): EVA, RAROC
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Short Intro to Economic Value Added - EVA
EVA can be used by investors / shareholders to determine how their capital is performing (compared to other potential investments). For companies EVA ...
Usage (application): Economic Value Added - EVA
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Compare with Economic Value Added: Market Value
Added | PRVit
| CFROI |
Economic Margin |
CVA |
EBIT |
EBITDA |
Cash Ratio |
Current Ratio |
Return on Equity |
DuPont Model |
Fair Value |
TSR |
Cash Flow from Operations
| Dividend Payout Ratio
| Cost-Benefit Analysis
| Relative Value of
Growth | PEG Ratio
Return to Management Hub: Decision-making & Valuation | Finance & Investing | Human
Resources
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Special Interest Group Leader
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Mehul Doshi Doshi