Economic Value Added
Economic value added (EVA) is a measure of a companys economic performance. It is a technique used to evaluate a companys financial performance based on the residual wealth created by the company after considering the cost of capital invested in the business. EVA is a measure of the amount of value a business has created for its shareholders, above and beyond the amount of money the shareholders have invested in the business. EVA essentially takes into account the amount of money invested in the business, as well as the companys profits.
The basic formula for calculating EVA is net operating profits after taxes (NOPAT) minus capital cost, multiplied by the amount of capital invested. NOPAT is the operating profits of the business, minus taxes. Capital cost is the cost of using the capital invested. EVA can be calculated for a single period (such as one month or one year) or for multiple periods.
When calculating the EVA of a business, the analyst will take into account all of the costs incurred by the company, including capital costs, operating costs, labor costs, depreciation costs, and interest expenses. These costs will be subtracted from the companys operating profits, to get the NOPAT. This amount is then multiplied by the amount of capital invested in the business. The result of this calculation will be the EVA for that period.
An EVA analysis can provide a business owner or investor with valuable information about how to increase the profitability of a business. It can also provide insight into how much additional value the business is providing to its shareholders, compared to the amount of money they have invested in the business. By analyzing EVA, business owners can identify areas of their business that could improve their financial returns or areas of focus where they can increase the value of their business.
EVA can also be used to compare the economic performance of different businesses. By comparing the EVA of different businesses, investors and business owners can identify which businesses are providing the most value for their investors. This can be valuable information when deciding where to invest capital or when making decisions about which businesses to invest in.
In addition to being a measure of financial performance, EVA can also be used to measure the performance of a companys management team and the decisions they have made over the course of the business. By calculating EVA, investors and business owners can identify areas where the companys management team may need to improve their performance or areas where they have done particularly well.
Overall, EVA can be a valuable tool for evaluating a companys financial performance and providing valuable insight into the value a business is providing to its shareholders. It can be used to identify areas where the company can improve its performance or where it is performing particularly well. It can also provide investors and business owners with valuable insight into the performance of a companys management team and the decisions they have made.
