Economic Value Added (EVA) is often defined as the value of an activity that is left over after subtracting from it the cost of executing that activity and the cost of having lost the opportunity of investing consumed resources in an alternative activity. In business terms, one could calculate EVA as Income from Operations - rate of interest in sovereign debt, if sovereign debt can be considered an alternative opportunity to invest working capital and equity. The concept of Economic Profit is closely linked to EVA. However, Economic Profit is not adjusted.

The underlying concept was first introduced by Eugen Schmalenbach, and the current theory was formulated by Joel M. Stern.

Stern Stewart & Company

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Stern Stewart & Company owns a registered trademark for EVA™ for a brand of software and financial consulting/training services. The proprietary component of what Stern Stewart & Co. does is the adjustments. The amortisation of goodwill or capitalisation of brand advertising and other similar adjustments are the translations that occur to Economic Profit to make it EVA.

Calculating EVA

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In the field of corporate finance, economic value added is a way to determine the value created, above the required return, for the shareholders of a company.

The basic formula is:

$EVA\; \backslash \; =\; \backslash \; (\; r\; -\; c\; )\; \backslash cdot\; K\; \backslash \; =\; \backslash \; NOPAT\; -\; c\; \backslash cdot\; K$

where

$r\; =\; \{\; NOPAT\; \backslash over\; K\; \}$ ,

is the firm's return on capital, NOPAT is the Net Operating Profit After Tax and c is the Weighted Average Cost of Capital (WACC).

Shareholders of the company will receive a positive value added when the return from the equity employed in the business operations is greater than the cost of that capital; see Working capital management. Any value obtained by employees of the company or by product users is not included in the calculations.

Other Measures of Shareholder value

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• Added Value
• Market value added

See also

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• Value added
• Free cash flow
• Weighted average cost of capital

References

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External links

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• Economic Value Added from Stern Stewart & Company
• Economic Value Added (EVA), Prof. Aswath Damodaran
• EVA valuation tutorial from valuatum.com
• Understanding Economic Value Added, nvestopedia.com
• All About EVA, investopedia.com
• Economic Value Added: A simulation analysis of the trendy, owner-oriented management tool, Timo Salmi and Ilkka Virtanen, 2001

Value

Economic Value Added | Valor econômico adicionado | Eva