Economic_value_added

Corporate finance

Working capital management Cash conversion cycle Return on capital Economic value added Just In Time Economic order quantity Discounts and allowances Factoring (finance)

Capital budgeting Capital investment decisions The investment decision The financing decision Capital investment decisions

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In corporate finance, Economic Value Added or EVA^® is an estimate of true economic profit after making corrective adjustments to GAAP accounting, including deducting the opportunity cost of equity capital. GAAP is estimated to ignore US$300 billion in shareholder opportunity costs. EVA can be measured as Net Operating Profit After Taxes(or NOPAT) less the money cost of capital. Money cost of capital refers to the amount of money rather than the proportional rate (cost of capital). The amortization of goodwill or capitalization of brand advertising and other similar adjustments are the translations that occur to Economic Profit to make it EVA. The EVA is a registered trademark by its developer, Stern Stewart & Co.

Calculating EVA

In the field of corporate finance, economic value added is a way to determine the value created, above the required return, for the shareholders of a company.

The basic formula is:

$EVA\; \backslash \; =\; \backslash \; (\; r\; -\; c\; )\; \backslash cdot\; K\; \backslash \; =\; \backslash \; NOPAT\; -\; c\; \backslash cdot\; K$

where

$r\; =\; \{\; NOPAT\; \backslash over\; K\; \}$ , called the Return on Invested Capital (ROIC).

is the firm\'s return on capital, NOPAT is the Net Operating Profit After Tax, c is the Weighted Average Cost of Capital (WACC) and K is capital employed.

Shareholders of the company will receive a positive value added when the return from the capital employed in the business operations is greater than the cost of that capital; see Working capital management. Any value obtained by employees of the company or by product users is not included in the calculations.

Criticism

EVA could be misleading as a wealth metric because it reflects momentary swings in the capital markets rather than inherent company performance.^{[citation needed]}

EVA is also shareholder-centric and hence of little relevance to the rest of the stake holders.^{[citation needed]}

EVA is identical to residual income, which was largely abandoned by US companies years ago (Keys, Azamhuzjaev, and Mackey, 2001).

Other measures of shareholder value

• Added Value
• Market value added
• Total Shareholder Return

See also

• Business valuation
• Free cash flow
• Enterprise value
• Opportunity cost
• Value added
• Weighted average cost of capital

References

• G. Bennett Stewart III (1991). The Quest for Value. HarperCollins. 
• Stephan Hostettler, Hermann Stern. Das Value Cockpit. Wiley. 

External links

• Economic Value Added from Stern Stewart & Company
• Economic Value Added from EVA Dimensions LLC
• Economic Value Added (EVA), Prof. Aswath Damodaran
• EVA valuation tutorial from valuatum.com
• Understanding Economic Value Added, investopedia.com
• All About EVA, investopedia.com
• Economic Value Added: A simulation analysis of the trendy, owner-oriented management tool, Timo Salmi and Ilkka Virtanen, 2001

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