Economic Value Added - EVA

“EVA” for short. Also known as “economic profit,” it was invented by a company called Stern Value Management as a way of measuring a company’s financial performance. You basically deduct the equity cost of a company’s capital from its operating profit and adjust for taxes on a cash basis.

Clear as mud? Well, what you’re doing is finding whatever value a company created which is greater than the amount required by its shareholders.

So let’s say a company has $100,000 capital invested at the beginning of the year. The Net Operating Profit After Tax for the year is $9,700, and your Weighted Average Cost of Capital is 7.5%. Our formula would then be: [$9,700 - (0.075 x $100,000)] = our EVA of $2,200. What does that $2,200 mean? It means that riding on the backs of our company assets, the investment produced for us a risk-and-capital-cost-adjusted benefit of an incremental 2,200 bucks. Woot...ish.