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Economic Value Added
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What is EVA? DefinitionEconomic 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 MVAUnlike 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 EPSUnlike 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. FormulaThe 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 wealthEVA was developed to help managers to incorporate two basic principles of finance into their decision making:
Some specific usages of EVA include:
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 -
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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© 2021 12manage - The Executive Fast Track. V15.7 - Last updated: 25-1-2021. All names ™ of their owners.