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.

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'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 >>
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 total revenue?

Understand the difference between economic value added and total revenue. Learn what each type measures and how it indicates ... Read Answer >>

6. ### What is the difference between economic value and market value?

Related Articles
1. Investing

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

3. Insights

### 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.
4. Investing

### Calculating Economic Profit

Economic profit is the difference between the revenue a firm earns from sales and the firmâ€™s total opportunity costs.
5. Investing

### What is Warren Buffett's Investing Style?

Warren Buffet uses a value-investing style in assessing a company.
6. Investing

### 4 Tips to Evaluate Growth Companies (KO, AAPL)

Discover the best metrics for stock investors to utilize when selecting and evaluating the best opportunities in growth investing.
7. Investing

### Company Clone Cost Reveals True Value

Find out how calculating a reproduction cost for a company can beat out the dividend discount model.

### Value Investing Strategies in a Volatile Market

Volatile markets are a scary time for uneducated investors, but value investors use volatile periods as an opportunity to buy stocks at a discount.
9. Investing

### Understanding Profit Metrics: Gross, Operating and Net Profits

Rather than relying solely on net profit figures to evaluate a company's performance, seasoned investors will often look at gross profit and operating profit as well.
10. Investing

### Evaluating Retained Earnings: What Gets Kept Counts

A company's retained earnings matter. Be investment-savvy and learn how to analyze this often overlooked information.
RELATED TERMS
1. ### Economic Capital

The amount of capital that a firm, usually in financial services, ...
2. ### Net Operating Profit After Tax - NOPAT

A company's potential cash earnings if its capitalization were ...
3. ### Investment Center

A business unit that can utilize capital to directly contribute ...
4. ### Equity Market Capitalization

A measure of the total market value of an equity market. The ...
5. ### Eva Longoria Stock Index

A stock index comprised of companies related to the actress Eva ...
6. ### Return on Market Value of Equity - ROME

Return on market value of equity (ROME) is a comparative measure ...
Hot Definitions
1. ### Stagflation

A condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, ...
2. ### Notional Value

The total value of a leveraged position's assets. This term is commonly used in the options, futures and currency markets ...
3. ### Interest Expense

The cost incurred by an entity for borrowed funds. Interest expense is a non-operating expense shown on the income statement. ...
4. ### Call Option

An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
5. ### Pro-Rata

Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
6. ### Private Placement

The sale of securities to a relatively small number of select investors as a way of raising capital.