Economic value added
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Economic Value Added (EVA) is often defined as the value of an activity that is left over after substracting from it the cost of executing that activity and the cost of having lost the opportunity of investing consumed resources in an alternative activity. In Business terms, one could calculate EVA as Income from Operations - rate of interest in sovereign debt. If sovereign debt can be considered an alternative opportunity to invest working capital and equity. The concept of Economic Profit is closely linked to EVA. However, Economic Profit is not adjusted.
EVA is also the registered trademark of Stern Stewart & Co. - the organisation that created this concept. The 'proprietary' component of what Stern Stewart & Co. does is the adjustments. The amortisation of goodwill or capitalisation of brand advertising and other similar adjustments are the translations that occur to Economic Profit to make it become 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 = NOPAT - (NOA * WACC)
Where :
NOPAT = Net operating profit after taxes
NOA = Net operating assets
WACC = Weighted average cost of capital
Shareholders of the company will receive a positive value added when the return from the equity 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.
The underlying concept has first been introduced by Schmalenbach, but the way EVA is used today has been developed by Stern Stewart & Co. which also is owner of the registered trademark EVA.
See also
External links
- EVA valuation tutorial (http://www.valuatum.com/valuation/valuation_tutorial_tiedostot/frame.htm#slide0132.htm) from valuatum.com
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