Economic Value Added
The purpose of this concept is to provide an overview and analysis of the Economic Value Added (EVA) metric as a method to calculate the economic profit of a company. The concept shows what the EVA metric is and highlights some advantages and disadvantages from its proponents and critics.
Economic Value Added Definition
Economic Value Added (EVA) is the profit earned by the firm, less the cost of financing its capital (Stewart, 1991). It is also known as 'economic profit'. EVA captures the idea that value is created when the return on the company's capital employed is greater than the cost of that capital. It can be calculated by making adjustments to standard company accounts - potentially there are over one hundred adjustments to be made. For most firms, however, only a handful of alterations are material to the final estimate: EVA = Net Operating Profit after Taxes - Cost of Capital.
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Economic Value Added References (4 of up to 20) *
- Austin, L.M. (2005) Benchmarking to Economic Value Added: The Case of Airways Corporation of New Zealand Limited. Benchmarking: An International Journal, Vol. 12(2), pp. 138–150.
- Biddle, G.C., Bowen, R.M. and Wallace, J.S. (1997) Does EVA Beat Earnings? Evidence on Associations with Stock Returns and Firm Values. Journal of Accounting and Economics, Vol. 24(3), pp. 301-336.
- Blair, A (1997) UK: EVA Fever. Management Today. Wednesday, 1 January.
- Brigham, E. and Houston, J. (1998) Fundamentals of Financial Management. (8th Ed.) Dryden.
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