Economic Value Added (EVA)
Economic Value Added (EVA) is a measure of a company’s financial performance that calculates the profit generated by the company after accounting for the cost of capital. It is a way to measure the true economic profit of a company, taking into account the opportunity cost of the capital invested in the business.
EVA is calculated by subtracting the cost of capital from the Net Operating Profit After Tax (NOPAT). The formula for EVA is as follows:
EVA = NOPAT – (WACC * Capital Employed)
Where:
- NOPAT = Net Operating Profit After Tax
- WACC = Weighted Average Cost of Capital
- Capital Employed = Total assets – Current liabilities
For example, if a company generates a NOPAT of $1,000,000 and the cost of capital is 10% with a capital employed of $5,000,000, the EVA would be:
EVA = $1,000,000 – (10% * $5,000,000) = $500,000
A positive EVA indicates that the company is creating value for its shareholders, while a negative EVA indicates that the company is not generating enough profit to cover the cost of capital.
Overall, Economic Value Added is a useful tool for investors and analysts to assess the true profitability of a company and its ability to create value for its shareholders.
For more information, you can visit the Wikipedia page on Economic Value Added.