EVA (Economic value added)

Economic value added (EVA) is a measure of by how much a company's returns exceed those required by suppliers of capital. It therefore tells one how much wealth the company has created for providers of capital (meaning shareholders). The exact definition used varies, but, in essence it is:

EVA = P - WACC ×(D + S)

where P is NOPAT
WACC is weighted average cost of capital
D is the amount of debt funding and
S is the amount of shareholder's equity.

The operating profit number used is adjusted in a number of ways, including for amortisation. The amount of capital used is also subject to various adjsutments including capitalising R & D and operating leases.

The aim of EVA is to provide management with a measure of their success in increasing shareholder's wealth: a better measure than profit of how much the company had made for shareholders.

It is not of much direct use for valuation, but that is not what it is intended for. However, even in its intended role, the lack of risk adjustment for taking on debt means that it has an in-built bias in favour of high gearing.

EVA is a trademark of Stern Stewart & Co. It is not the only such term to be trademarked, but is the best known.

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