Sponsored Link

Economic Value Added (EVA)

EVA is a measure of a company’s performance less the cost of capital.

EVA = NOPAT - Cost of Capital

Where: NOPAT = EBIT * (1 - Tax Rate)
Where: Cost of Capital = Capital * Weighted Average of Interest Rates

Capital comes in two form: debt and equity. Whereas the cost of debt capital can easily be calculated from the expressed interest rate; the cost of equity capital needs to be estimated through one of several formulas.

For investors the actual EVA value matters less than the change in value. If EVA is positive but is trending to become less positive it is not a good signal. Conversely, if EVA is negative but is expected to rise into positive territory it is a good signal.

Economic Value Added is Trade Marked by Stern Stewart & Company