Economic value added

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v d e

Economic Value Added (EVA) is an estimate of true economic profit after making corrective adjustments to GAAP accounting, including deducting the opportunity cost of equity capital. EVA can be measured as Net Operating Profit After Taxes(or NOPAT)less the cost of capital, equity as well as debt. The concept of Economic Profit is closely linked to EVA. However, Economic Profit is not adjusted.

The underlying concept was first introduced by Eugen Schmalenbach, and the current theory was formulated by Bennett Stewart and Joel M. Stern.

Contents

[edit] Stern Stewart & Company

Stern Stewart & Company owns a registered trademark for EVA™ for a brand of software and financial consulting/training services. 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 EVA.

[edit] 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 \ = \ ( r - c ) \cdot K \ = \ NOPAT - c \cdot K

where

r = { NOPAT \over K } , called the return on capital employed (ROCE)

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.

[edit] Other Measures of Shareholder value

[edit] See also

[edit] References

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

[edit] External links


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