A:

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.

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

    Learn how economic value added (EVA) and market value added (MVA) company valuations differ and the circumstances under which ... Read Answer >>
  2. What is the point of calculating economic value added (EVA)?

    Understand the reason for calculating economic value added, or EVA, as well as the performance it measures. Learn when a ... Read Answer >>
  3. What's the difference between economic value added (EVA) and accounting profit?

    Learn the differences between economic value added and accounting profit. Understand the numbers used in each calculation ... Read Answer >>
  4. What's the difference between economic value added (EVA) and economic rent?

    Understand the difference between economic value added and economic rent. Learn what each economic principle is used to measure ... Read Answer >>
  5. What's the difference between economic value added (EVA) and total revenue?

    Understand the difference between economic value added and total revenue. Learn what each type measures and how it indicates ... Read Answer >>
  6. How can a company improve its Economic Value Added (EVA)?

    Find out about some of the ways a company could try to improve its economic profit, also known as its economic value added, ... Read Answer >>
Related Articles
  1. Markets

    EVA: Overview

    By David Harper, (Contributing Editor- Investopedia Advisor) Contact David Examining the components of economic profit and studying the finer points of its calculation require an understanding ...
  2. Options & Futures

    All About EVA

    Looking for a formula to determine whether a company is creating wealth? Time to learn all about economic value added.
  3. Fundamental Analysis

    Understanding Market Value Added (MVA)

    Market value added is the difference between a company’s market value and the capital that bondholders and shareholders have contributed to it.
  4. Investing Basics

    Economic Value Added - EVA

    Learn about this metric that measures a company's financial performance based on its residual wealth.
  5. Professionals

    Economics and The Time Value of Money

    Economics and The Time Value of Money
  6. Markets

    EVA: What Does It Really Mean?

    By David Harper, (Contributing Editor - Investopedia Advisor) Contact David As we performed a sequence of calculations to find Disney's (DIS) 2004 economic profit, we discovered that despite ...
  7. Investing Basics

    Explaining Market Value of Equity

    Market value of equity is the total value of all the outstanding stock as measured in the stock market at a particular time.
  8. Markets

    EVA: Conclusion

    By David Harper, (Contributing Editor - Investopedia Advisor) Contact David Economic profit - otherwise known as "Economic Value Added" (EVA™) is based on classic financial theory, and, ...
  9. Fundamental Analysis

    Market Value Versus Book Value

    Understanding the difference between book value and market value is a simple yet fundamentally critical component to analyze a company for investment.
  10. Economics

    What's Economic Capital?

    While regulatory and economic capital use some of the same measurements of risk to determine how much capital a firm should hold in reserve, economic capital uses more realistic measures.
RELATED TERMS
  1. Economic Value Added - EVA

    A measure of a company's financial performance based on the residual ...
  2. Market Value Added - MVA

    A calculation that shows the difference between the market value ...
  3. Economic Profit (Or Loss)

    The difference between the revenue received from the sale of ...
  4. Invested Capital

    The total amount of money that was endowed into a company by ...
  5. Equity Market Capitalization

    A measure of the total market value of an equity market. The ...
  6. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure ...

You May Also Like

Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center