Economic value added (EVA) is a performance measure developed by

Stern Stewart & Co that attempts to measure the true economic profit produced by a company. It is frequently also referred to as "economic profit", and provides a measurement of a company's economic success (or failure) over a period of time. Such a metric is useful for investors who wish to determine how well a company has produced value for its investors, and it can be compared against the company's peers for a quick analysis of how well the company is operating in its industry.

Economic profit can be calculated by taking a company's net after-tax operating profit and subtracting from it the product of the company's invested capital multiplied by its percentage cost of capital. For example, if a fictional firm, Cory's Tequila Company (CTC), has 2005 net after-tax operating profits of $200,000 and invested capital of $2 million at an average cost of 8.5%, then CTC's economic profit would be computed as $200,000 - ($2 million x 8.5%) = $30,000. This $30,000 represents an amount equal to 1.5% of CTC's invested capital, providing a standardized measure for the wealth the company generated over and above its cost of capital during the year.

Market value added (MVA), on the other hand, is simply the difference between the current total market value of a company and the capital contributed by investors (including both shareholders and bondholders). MVA is not a performance metric like EVA, but instead is a wealth metric, measuring the level of value a company has accumulated over time. As a company performs well over time, it will retain earnings. This will improve the book value of the company's shares, and investors will likely bid up the prices of those shares in expectation of future earnings, causing the company's market value to rise. As this occurs, the difference between the company's market value and the capital contributed by investors (its MVA) represents the excess price tag the market assigns to the company as a result of it past operating successes.

To learn more, read the Economic Value Added Tutorial and All About EVA.

  1. What is the difference between Economic Value Added (EVA) and Market Value Added ...

    There are numerous ways that investors and lenders can estimate the valuation of a company. This becomes increasingly important ... Read Full Answer >>
  2. Which is more important to economists, the marginal propensity to consume or the ...

    Economic profit is a measure of a company's performance found by calculating the amount it generates in revenues. Use Microsoft ... Read Full Answer >>
  3. What's the difference between economic value added (EVA) and accounting profit?

    Economic value added (EVA) is a measure of a company's economic profit, which is the profit earned by a company minus the ... Read Full Answer >>
  4. What is the point of calculating economic value added (EVA)?

    Economic value added, or EVA, is a management performance measure that shows the profit earned by a company minus the cost ... Read Full Answer >>
  5. How do analysts and investors interpret Economic Value Added?

    Economic value added (EVA) is an important metric widely used in corporate finance to determine the amount of value a company ... Read Full Answer >>
  6. How can a company improve its Economic Value Added (EVA)?

    There are two major ways a company can improve its economic value added, or EVA: increase revenues or decrease capital costs. ... Read Full Answer >>
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