What Is Economic Value Added (EVA)?

Economic value added (EVA) is a measure of a company's financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis. EVA can also be referred to as 澳洲幸运5官方开奖结果体彩网:economic profit, as it attempts to capture the true economic profit of a company. This measure was devised by management consulting firm Stern Value Management, originally incorporated as Stern Stewart & Co.

Understanding Economic Value Added (EVA)

EVA is the incremental difference in the 澳洲幸运5官方开奖结果体彩网:rate of return (RoR) over a company's cost of capital. Essentially, it is used to measure the value a company 澳洲幸运5官方开奖结果体彩网:generates from funds invested in it. If a company's EVA is negative, it means the company is not generating value from the funds invested into the business. Conversely, a 澳洲幸运5官方开奖结果体彩网:positive EVA shows a company is producing value fro🤪m the funds invested in it.

The formula for calculating EVA is:

EVA = NOPAT - (Invested Capital * WACC)

Where:

• NOPAT = Net operating profit after taxes
• 澳洲幸运5官方开奖结果体彩网:Invested capital = Debt + capital leases + shareholders' equity
• WACC = Weighted average cost of capital

Special Considerations

The equation for EVA shows that there are three key components to a company's EVA—NOPAT, the amount of capital invested, and the WACC. NOPAT can be calculated manually but is normally listed in a 澳洲幸运5官方开奖结果体彩网:public company's financials.

Capital invested is the amount of money used to fund a company or a specific project. WACC is the average rate of return a company expects to pay its investors; the weights are derived as a fraction of each financial source in a company's 澳洲幸运5官方开奖结果体彩网:capital structure. WACC can also be ca🐷lculated but is norജmally provided.

The equation used for invested capital in EVA is usually total assets minus current liabilities—two figures easily found on a firm's balance sheet. In this case, the modified formula for EVA is NOPAT - (total assets - current liabilities) * WACC.

As noted by Stern Value Management, in 1983 the management team developed EVA, "a new model for maximizing the value created that can also be used to provide incentives at all levels of the firm." The goal of EVA is to quantify the cost of investing capital into a certain p✃roject or firm and then assess whether it generates e𒈔nough cash to be considered a good investment. A positive EVA shows a project is generating returns in excess of the required minimum return.

Advantages and Disadvantages of EVA

EVA assesses the performance of a company and its management through the idea that a business is only profitable when it creates wealth and returns for 澳洲幸运5官方开奖结果体彩网:shareholders, thus requiring performance above a company's cost o🔯f capital.

EVA as a performance indicator is very useful. The calculation shows how and where a company created wealth, through the inclusion of 澳洲幸运5官方开奖结果体彩网:balance sheet items. This 🍌forces managers to be aware of assets and ex🦹penses when making managerial decisions.

However, the EVA calculation relies heavily on the amount of 澳洲幸运5官方开奖结果体彩网:invested capital and is best used for asset-rich companies that are stable or mature. Companies with 澳洲幸运5官方开奖结果体彩网:intangible assets, such as technology businesses, may not be g🗹ood candidat𓃲es for an EVA evaluation.