Economic Value Added
(EVA)

Knowledge Center

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

------------------------------------------------------

      Operating Profit (EBIT)

-     Taxes

------------------------------------------------------

      Net Operating Profit After Tax (NOPAT)

-     Capital Charges (Invested Capital x Cost of Capital)

------------------------------------------------------

      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:

1. The primary financial objective of any company should be to maximize the wealth of its shareholders.
2. 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 -

Forum - Performance Measurement   Discussions about Performance Measurement.   How to Calculate EVA Another way to describe how to calculate EVA: Economic Value Added = NOPAT - Capital Charges or Economic Value Added (...)           EVA for Corporate Incentives Is EVA a good metric to determine incentive compensation awards at the corporate level? Why? (...)           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 propriet (...)           What is the Impact of Debt on EVA? What is the impact debt is having on EVA? Thanks for your help. (...)           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 (...)         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 (...)           Revised Economic Value Added (REVA) What is the difference between EVA and Adjusted or Revised Economic Value Added (REVA)? And how can it be calculated? (...)           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 (...)           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 conc (...)           EVA applied to consulting services How can I apply an EVA model to the value added of consulting services on increased revenues. (...)

Expert Tips - Performance Measurement Here you will find advices by experts.   Weaknesses of EVA Value Based Management (...)       Benefits of EVA Value Based Management (...)       EVA Advantages EVA Implementation, Corporate Finance (...)       EVA and Market Value Management Control of Value Drivers. (...)       The Accounting Adjustments to EBIT Before Calculating EVA Value Based Management, Economic Value Added (...)

Resources - Performance Measurement Here you find powerpoint presentations, micro-learning videos and further information sources. EVA Adjustments EVA, Value Based Management (...)   Increasing and Measuring Value with EVA Financial Accounting, Value Based Management, Economic Value Added (...)   EVA and Cash value added do NOT measure shareholder value creation Measuring Value Creation (...)   Corporate Valuation for Businesses Corporate Valuation, Book Value, Market Value, Intrinsic Value, Fundamental Value, M&A, VBM, Fundamental Investing (...)   Optimal Capital Allocation Using RAROC and EVA EVA, RAROC (...)

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

More Management Methods, Models and Theory