Introduction:
Economic Value Added (EVA) is a financial metric that measures a company’s financial performance by taking into account the cost of capital and the opportunity cost of invested capital. It is a measure of how much value a company has created or destroyed for its stakeholders. EVA was first introduced by management consultant Stern Stewart & Co. in the 1990s as an alternative to traditional measures of financial performance such as earnings per share (EPS) and return on investment (ROI).
What is EVA?
Economic Value Added is a measure of a company’s true economic profit after deducting the cost of capital from its operating profit. It is calculated as the after-tax net operating profit minus the cost of capital multiplied by the company’s invested capital. EVA takes into account both the income statement and the balance sheet of a company, making it a more comprehensive measure of financial performance.
Why is EVA important?
EVA is important because it measures a company’s true economic profit, rather than just its accounting profit. Traditional measures of financial performance, such as EPS and ROI, can be distorted by accounting rules and can give an inaccurate picture of a company’s performance. EVA, on the other hand, provides a more accurate assessment of a company’s financial health and its ability to create value for its shareholders.
Who uses EVA?
EVA is primarily used by financial analysts, investors, and managers to evaluate a company’s financial performance and make strategic business decisions. It is also used by companies themselves to measure the effectiveness of their management and identify areas for improvement.
Use Cases:
1. Performance Evaluation: EVA is used by companies to evaluate the performance of their business units and managers. By measuring the value created by each unit or manager, companies can identify areas of improvement and reward their top-performing units or managers.
2. Investment Decision-making: EVA is used by investors to evaluate the potential of a company’s future investments. EVA provides a more accurate measure of a company’s profitability and helps investors make better-informed investment decisions.
3. Merger and Acquisition Analysis: EVA is also used in the evaluation and analysis of mergers and acquisitions. It helps companies determine the potential value creation from a merger or acquisition and assess the impact on shareholders’ value.
Applicability:
EVA is applicable to companies of all sizes and industries. It is particularly useful for companies with a high level of invested capital, such as manufacturing and service companies, as it takes into account the cost of capital and the opportunity cost of invested capital.
Synonyms:
EVA is also known by other names, such as Economic Profit, Economic Value Creation, and Economic Value Analysis.
Conclusion
In conclusion, Economic Value Added (EVA) is a financial metric that measures a company’s true economic profit by deducting the cost of capital from its operating profit. It provides a more accurate measure of a company’s financial performance and is used by financial analysts, investors, and managers to evaluate a company’s performance, make investment decisions, and analyze mergers and acquisitions. EVA is applicable to companies of all sizes and industries and is also known by other names such as Economic Profit and Economic Value Creation. As a comprehensive measure of financial performance, EVA should be considered by companies and investors in their decision-making processes.