Economic Value Added
(EVA)

Calculation of the true economic profit of a corporation. Explanation of Economic Value Added. EVA.

What is EVA? Definition

Economic Value Added (EVA) is a financial performance method to calculate the true economic profit of a corporation. EVA can be calculated as Net Operating Profit After Tax minus a charge for the opportunity cost of the capital invested.

EVA ( © / ™ Stern Stewart & Co.) is an estimate of the amount that earnings differ from the required minimum rate of return (against comparable risk) for shareholders or lenders. The difference can be both a surplus or a shortage.

EVA compared with MVA

Unlike Market-based measurements, such as MVA, EVA can be calculated for a divisional (Strategic Business Unit) level.

Unlike Equities measurements, EVA is a flow and can be used for performance evaluation over time.

EVA compared with EBIT and EPS

Unlike accounting profit, such as EBIT, Net Income and EPS, EVA is economic and is based on the idea that a company must cover both the operating costs AND the capital costs.

Calculation of EVA. Formula

The basic formula for calculating EVA is:

Net Sales

- Operating Expenses

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Operating Profit (EBIT)

- Taxes

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Net Operating Profit After Tax (NOPAT)

- Capital Charges (Invested Capital x Cost of Capital)

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Economic Value Added (EVA)

By taking all capital costs into account, including the cost of equity, EVA shows the financial amount of wealth a business has created or destroyed in a reporting period. In other words, EVA is profit in the way that shareholders define it. If the shareholders expect, say, a 10% return on their investment, they earn money only to the extent that their share of the NOPAT exceeds 10% of equity capital. Everything before that just builds up to the minimum acceptable compensation for investing in a risky enterprise.

USAGE of the EVA method: Aligning decisions with shareholder wealth

EVA was developed to help managers to incorporate two basic principles of finance into their decision making:

The primary financial objective of any company should be to maximize the wealth of its shareholders.
The value of a company depends on the extent to which investors expect that future profits will differ from the cost of capital. By definition, a sustained increase in EVA will result in an increase in the market value of a company. This approach has proved valid and effective for many types of organizations. This is because the level of EVA isn't what really matters. Current performance already is reflected in share prices. It is the (continuous) improvement in EVA that brings (continuous) increases in shareholder wealth.

Some specific usages of EVA include:

To set organizational goals.
Performance measurement.
Determining of bonuses.
Communication with shareholders and investors.
Motivation of managers.
Capital budgeting.
Corporate valuation.
Analyzing equities.

Book: S. David Young, Stephen F. O'Byrne - EVA and Value-Based Management.. -

Book: Aswath Damodaran - Investment Valuation: Tools and Techniques for Determining.. -

Book: James R. Hitchner - Financial Valuation: Applications and Models -

Economic Value Added Forum (12)

What is EVA Momentum?
EVA Momentum is the change in a business's EVA divided by the prior period's sales (revenue). It was developed by Bennet Stewart of EVA Dimensions. It is an application of EVA that measures the EVA growth rate, scaled to the size of the company.
As a result, it helps investors determine how much value the company is creating for its shareholders. Because the metric is based on the % change in profit rather than the absolute amount of economic profit, companies of various sizes may be compared.
The formula of EVA Momentum is as follows:

EVA Momentum = (This year’s EVA – Last year’s EVA) / Last year’s Sales

For example, if last year a frim had EVA of $ 6 million and this year they acheeved $ 7 million in EVA, then the comapny increased its EVA by $ 1 million. If last year sales (revenue) were $ 100 million, that represents an EVA Momentum Ratio of 1% ($ 1 million divided by $ 100 million).

Have you ever used EVA “Momentum” to evaluate your company's performance? What were the main conclusions?

What is the Impact of Debt on EVA?
What is the impact debt is having on EVA? Thanks for your help.

Revised Economic Value Added (REVA)
What is the difference between EVA and Adjusted or Revised Economic Value Added (REVA)?
And how can it be calculated?
Thank you all..

EVA for Corporate Incentives
Is EVA a good metric to determine incentive compensation awards at the corporate level? Why?

How to Calculate EVA
Another way to describe how to calculate EVA:
Economic Value Added = NOPAT - Capital Charges
or
Economic Value Added = NOPAT - ( Invested Capital * WACC )
or
Economic Value Added = Invested Capital * ( ROIC - WACC )

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