Understanding Economic Value Added
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  1. EVA: Introduction
  2. EVA: Overview
  3. EVA: Calculating NOPAT
  4. EVA: Calculating Invested Capital
  5. EVA: Pulling It All Together
  6. EVA: What Does It Really Mean?
  7. EVA: Conclusion

EVA: Introduction


By David Harper, (Contributing Editor - Investopedia Advisor)
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From a commercial standpoint, Economic Value Added (EVA™) is the most successful performance metric used by companies and their consultants. Although much of its popularity is a result of able marketing and deployment by Stern Stewart, owner of the trademark, the metric is justified by financial theory and consistent with valuation principles, which are important to any investor's analysis of a company.

To many, the EVA™ metric (also known as "economic profit") basks in a mystique of complexity. But this tutorial will show you that this complexity is only an illusion. In fact, the entire metric is a development of three simple ideas: cash is king; some expense dollars are really investments in "disguise"; and equity capital is expensive.

To help you understand EVA™ and its components, we devote each chapter of this tutorial to exploring a different conceptual aspect of economic value added (EVA™) and demonstrating the associated calculations. Over the course of these chapters, we build an EVA™ calculation for the Walt Disney Co (DIS), a publicly traded company, using recent financial statements. And, at the end of this study of EVA™, we compare it to other performance metrics.

By the end of this tutorial, you will not only be able to calculate EVA™ for yourself, but also, importantly, understand its strengths and weaknesses, observing how it is ideal for some situations, but also - contrary to some dogma - not necessarily the best performance metric for many other situations.

Because the term EVA™ is trademarked, for convenience's sake, we will instead refer to it as economic profit throughout the tutorial. This is a common practice and, for our purposes, there is no difference.

EVA: Overview

  1. EVA: Introduction
  2. EVA: Overview
  3. EVA: Calculating NOPAT
  4. EVA: Calculating Invested Capital
  5. EVA: Pulling It All Together
  6. EVA: What Does It Really Mean?
  7. EVA: Conclusion
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RELATED FAQS
  1. 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 >>
  2. Why should fundamental investors pay attention to Cash Value Added (CVA)?

    Cash value added (CVA) can help fundamental investors evaluate how well a company can meets its cash flow needs over time. ... Read Full Answer >>
  3. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
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    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How can EV/EBITDA be used in conjunction with the P/E ratio?

    Because they provide different perspectives of analysis, the EV/EBITDA multiple and the P/E ratio can be used together to ... Read Full Answer >>

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