Definition
EVA measures the dollar value created above the required return on capital. Positive EVA means the company earns more than its cost of capital, creating shareholder value. It aligns management incentives with shareholder interests better than accounting profits.
Formula
EVA = NOPAT - (Invested Capital × WACC)
Example
NOPAT of $50M with $400M invested capital at 10% WACC: EVA = $50M - ($400M × 10%) = $10M. The company creates $10M in economic value annually.
FAQ
What is Economic Value Added (EVA)?
Operating profit minus the cost of capital employed.
How do you calculate Economic Value Added (EVA)?
A common formula for Economic Value Added (EVA) is: EVA = NOPAT - (Invested Capital × WACC)
Why is Economic Value Added (EVA) important?
Economic Value Added (EVA) helps investors evaluate profitability and make more informed decisions.