Understanding Economic Value Added
AAA
  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

EVA: Introduction


By David Harper, (Contributing Editor - Investopedia Advisor)
Contact David

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
EVA: Introduction
RELATED TERMS
  1. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  2. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...
  3. Net Present Value - NPV

    The difference between the present value of cash inflows and ...
  4. Total Debt-to-Capitalization Ratio

    An indicator that measures the total amount of debt in a company’s ...
  5. Price-To-Cash-Flow Ratio

    The ratio of a stock’s price to its cash flow per share. The ...
  6. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its ...
  1. What is the difference between economic value added and market value added?

    Economic value added (EVA) is a performance measure developed by Stern Stewart & Co that attempts to measure the true ...
  2. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The concept of CAGR is relatively straightforward and requires only three primary inputs: an investments beginning value, ...
  3. What are some common traits of undervalued stocks?

    There are a few basic factors found in companies that are worth more than their current stock price.
  4. What are the best indicators for evaluating technology stocks?

    Technology stocks are often some of the most discussed stocks on the news. How can investors spot the company that will roll ...
comments powered by Disqus
Related Tutorials
  1. Ratio Analysis Tutorial
    Fundamental Analysis

    Ratio Analysis Tutorial

  2. Introduction to Stock Trader Types
    Active Trading Fundamentals

    Introduction to Stock Trader Types

  3. Guide to Pairs Trading
    Trading Strategies

    Guide to Pairs Trading

  4. Guide To Excel For Finance
    Fundamental Analysis

    Guide To Excel For Finance

  5. Guide To Measuring Oil And Gas Companies
    Fundamental Analysis

    Guide To Measuring Oil And Gas Companies

Trading Center