There are two major ways a company can improve its economic value added (EVA): increase revenues or decrease capital costs. Revenue can be increased by raising prices or selling additional goods and services. Capital costs can be minimized in several ways, including increasing economies of scale. It is also possible for a firm to offset capital costs by choosing investments that earn more than their associated capital charges.
In the EVA formula, a firm's revenue is expressed as being equal to net operating profits after tax (NOPAT). Capital costs are traditionally estimated using a weighted average cost of capital (WACC or $WACC). EVA, also known as economic profit, is the result of subtracting all net capital charges from NOPAT. It is one of the most popular profitability metrics used by companies and fundamental analysts.
If a company wants to improve its EVA by adding to its revenues, it must ensure the marginal revenue gain is larger than the accompanying marginal costs, including taxes. This makes sense – you would not spend $150 to earn $100 in revenue. Since revenue generation is usually uncertain, it is often easier for a company to reduce its net capital costs.
Net capital costs can be lowered by reducing operating expenses, increasing marginal productivity or both. A company might renegotiate with its creditor to acquire a lower interest rate on debt or call in preferred shares and reissue them at a lower rate.
Economic value added is sometimes also referred to as shareholder value added (SVA), although some companies might make different adjustments in their NOPAT and cost of capital calculations. These are not the same as cash value added (CVA), which is a metric used by value investors to see how well a company can generate cash flow.
(For related reading, see "Understanding Economic Value Added.")