EVA
2 July 2021
EVA (or Economic Value Added) is a measure of a company’s economic profit. The indicator was developed and copyrighted by Stern-Stewart. Central to the EVA measure is the idea that companies have to take into account the cost of capital (for both equity and debts) before they can make a judement on whether the company has added real economic value or not.
The argument is that here is an opportunity cost of capital, i.e. instead of investing into a specific company or business venture, investors could put their money in other places such as Government bonds, the bank or equity markets). In order to identify true economic value it is therefore important to deduct the cost of capital (opportunity costs).
EVA = NOPAT – (C x K)
Where:
NOPAT is Net Operating Profit after Tax
C is the Weighted Average Cost of Capital (WACC), which represents the rate that a company is expected to pay on average to all its security holders to finance its assets
K is the economic capital employed
This indicator is included in the book: Key Performance Indicators – the 75+ measures every manager needs to know, which contains an in-depth description of this KPI, as well as practical advice on data collection, calculations, target setting, and actual usage.
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