Economic Value Added
What is economic value added?
Economic value added (EVA) is a corporate financial term for the valuation of a company's economic profit after it has reached the required return of its shareholders. The idea is that profit is generated from a company’s economic capital when that capital exceeds expenses.
Where have you heard about economic value added?
Economic value is calculated by subtracting cost of capital from operating profit, adjusted for taxes. EVA aims to capture the real economic value of a company and is also known as economic profit. Another similar approach is residual income valuation.
What you need to know about economic value added...
The concept of economic value added was devised by Stern Stewart and company and is rooted in the belief that a firm is only successful profitably when it creates revenue and rebound for its shareholders and a profit which exceeds a companies cost of capital. This makes EVA a very useful tool of gauging performance. Through balance sheets, this method can chart exactly where and how a company has generated its wealth. A project that generates a profit that exceeds its returns of the required minimum return is considered a positive EVA.