Economic Value Added

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Term Definition
Economic Value Added

A measure of a company's economic profit by subtracting the cost of capital from operating profit

Economic Value Added (EVA) is a performance metric used to measure the true economic profit of a company or project. It goes beyond traditional profit measures like net income by considering the cost of capital invested in the business. Here's a breakdown:

Key Idea:

  • Traditional profit measures don't consider the cost of using investors' money.
  • EVA subtracts the cost of capital from operating profit to arrive at the economic profit, which reflects the value created for shareholders beyond just covering their required return.


EVA = Net Operating Profit - (Cost of Capital x Invested Capital)


  • Net Operating Profit: Earnings before interest and taxes (EBIT) adjusted for non-cash items.
  • Cost of Capital: The minimum rate of return investors expect on their investment (usually calculated using a weighted average of debt and equity costs).
  • Invested Capital: Total assets employed in the business, less non-operating assets and current liabilities.


  • Positive EVA: The company is creating value for shareholders.
  • Negative EVA: The company is destroying value for shareholders.
  • Zero EVA: The company is just covering its cost of capital, not creating additional value.


  • More accurate reflection of true economic profit.
  • Encourages efficient use of capital.
  • Useful for comparing companies across industries.


  • Relies on estimates for certain values, leading to potential subjectivity.
  • Can be complex to calculate and interpret.

Overall, EVA is a valuable tool for assessing a company's financial performance and its ability to create shareholder value.

Here are some additional points to consider:

  • EVA is just one metric and should be used in conjunction with other financial analysis tools.
  • Different approaches exist for calculating EVA, leading to potential variations in results.
  • The cost of capital used in the calculation can significantly impact the EVA value.
Synonyms: EVA