Loading the player...

What is 'Economic Value Added - EVA'

Economic value added (EVA) is a measure of a company's financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis. EVA can also be referred to as economic profit, as it attempts to capture the true economic profit of a company. This measure was devised by management consulting firm Stern Value Management, originally incorporated as Stern Stewart and Co.

BREAKING DOWN 'Economic Value Added - EVA'

EVA is the incremental difference in the rate of return over a company's cost of capital. Essentially, it is used to measure the value a company generates from funds invested into it. If a company's EVA is negative, it means the company is not generating value from the funds invested into the business. Conversely, a positive EVA shows a company is producing value from the funds invested in it.

The formula for calculating EVA is: Net Operating Profit After Taxes (NOPAT) - Invested Capital * Weighted Average Cost of Capital (WACC)​​​

Components of EVA

The equation for EVA shows that there are three key components to a company's EVA: NOPAT, the amount of capital invested and the WACC. NOPAT can be calculated manually but is normally listed in a public company's financials. Capital invested is the amount of money used to fund a specific project. WACC is the average rate of return a company expects to pay its investors; the weights are derived as a fraction of each financial source in a company's capital structure. WACC can also be calculated but is normally provided as public record.

An equation for invested capital often used to calculate EVA is = Total Assets - Current Liabilities, two figures easily found on a firm's balance sheet. In this case, the formula for EVA is: NOPAT - (Total Assets - Current Liabilities) * WACC.

The goal of EVA is to quantify the charge, or cost, of investing capital into a certain project or firm and to then assess whether it generates enough cash to be considered a good investment. The charge represents the minimum return that investors require to make their investment worthwhile. A positive EVA shows a project is generating returns in excess of the required minimum return.

Benefits and Drawbacks of EVA

EVA assesses the performance of a company and its management through the idea that a business is only profitable when it creates wealth and returns for shareholders, thus requiring performance above a company's cost of capital.

EVA as a performance indicator is very useful. The calculation shows how and where a company created wealth, through the inclusion of balance sheet items. This forces managers to be aware of assets and expenses when making managerial decisions. However, the EVA calculation relies heavily on the amount of invested capital, and is best used for asset-rich companies that are stable or mature. Companies with intangible assets, such as technology businesses, may not be good candidates for an EVA evaluation.

  1. Eva Longoria Stock Index

    The Eva Longoria Stock Index is a stock index made up of companies ...
  2. Net Operating Profit After Tax ...

    A company's potential cash earnings if its capitalization were ...
  3. Weighted Average Cost Of Capital ...

    The calculation of a firm's cost of capital, in which each source ...
  4. Economic Profit (Or Loss)

    The difference between the revenue received from the sale of ...
  5. Abnormal Earnings Valuation Model

    The abnormal earnings valuation model is a method for determining ...
  6. Shareholder Value Added - SVA

    Shareholder value added (SVA) is a measure of the operating profits ...
Related Articles
  1. Investing

    All About EVA

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

    5 Things Whole Foods Management Wants You to Know (WFM)

    Whole Foods Market (NASDAQ: WFM) has revealed that its new concept stores, aimed at millennial shoppers and slated for a 2016 launch, will be named "365 by Whole Foods Market." Company management ...
  3. Investing

    Understanding Economic Value Added (TM)

    Discover the simplicity of Economic Value Added (TM), also known as economic profit.
  4. Small Business

    Explaining Cost Of Capital

    Cost of capital is the cost of funds used to finance a business.
  5. Investing

    Top 5 Timber Stocks of 2016 (WY, PCH)

    These five stocks offer appealing investments in the timber industry, based on dividend yield, financial health, valuation and analyst ratings.
  6. Personal Finance

    What to know for an investment banking interview

    Find out what you need to know and how to prepare for an investment banking interview.
  1. 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 >>
  2. 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 >>
  3. What's the difference between economic value added (EVA) and producer surplus?

    Understand economic value added and producer surplus. Learn why companies focus on economic value added and producers focus ... Read Answer >>
  4. What's the difference between economic value added and market value added?

    Find out how economic value added (EVA) and market value added (MVA) differ as measures of economic profit. Determine how ... Read Answer >>
  5. Why is it useful for investors to calculate Net Operating Profit After Tax for over-leveraged ...

    Understand why it is useful for investors to calculate net operating profit after tax (NOPAT) for overleveraged companies ... Read Answer >>
Hot Definitions
  1. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  2. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  3. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  4. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  5. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
  6. Restricted Stock Unit - RSU

    A restricted stock unit is a compensation issued by an employer to an employee in the form of company stock.
Trading Center