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Economic Value Added

See Also:
Activity Based Management
Capital Structure Management
How to collect accounts receivable
How to manage inventory
Why Exit Planning

Economic Value Added ¶

Economic Value Added Introduction

Economic value added (EVA) measures the effects of managerial actions. It focuses on managerial effectiveness in a given year.

Economic Value Added Formula

Economic value added = Operating profit after taxes – Cost of all capital

Or = (Sales revenue – operating costs –taxes) – (total capital supplied * cost of capital)

Economic Value Added Calculation

Example: a company has $10,000 in operating profit, $50,000 in debt and weighted average cost of capital of 10%.

EVA = 10,000 – (50,000 * 10%) = 5,000

Applications

EVA is an estimate of a company’s true economic profit for the year, and it differs substantially from accounting profit. It depends on both operating efficiency and balance sheet management: without operating efficiency, operating profits will be low, and without efficient balance sheet management, there will be too many assets, hence too much capital which results in higher-than necessary capital costs.