What is Economic Value Added – EVA
Well let’s take a look at two definitions first:
Definition 1
EVA. The monetary value of an entity at the end of an time period minus the monetary value of that same entity at the beginning of that time period.
Definition 2
For a company, after-tax earnings minus the opportunity cost of capital. As with any other entity, economic value added essentially measures how much more valuable a company has become during a given time period.
Soo with other words:
Economic Value Added (EVA) is a financial performance method to calculate the true economic profit of a corporation. EVA can be calculated as net operating after taxes profit minus a charge for the opportunity cost of the capital invested.
EVA is an estimate of the amount by which earnings exceed or fall short of the required minimum rate of return for shareholders or lenders at comparable risk.
- Unlike Market-based measures, such as MVA, EVA can be calculated at divisional (Strategic Business Unit) level.
- Unlike Stock measures, EVA is a flow and can be used for performance evaluation over time.
- Unlike accounting profit, such as EBIT, Net Income and EPS, EVA is Economic and is based on the idea that a business must cover both the operating costs AND the capital costs.
EVA can be used for the following purposes:
- setting organizational goals
- performance measurement
- determining bonuses
- communication with shareholders and investors
- motivation of managers
- capital budgeting
- corporate valuation
- analyzing equity securities
I hope this helped you to understand what EVA is.
Written by: Matt
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