---
title: Business Dictionary - Economic Value Added
description: "Economic Value Added - A measure of a company's economic profit by subtracting the cost of capital from operating profit"
url: https://view.ge/en/business-glossary/eva-en
---

# Economic Value Added

### Glossaries

| 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. Calculation: EVA = Net Operating Profit - (Cost of Capital x Invested Capital) Components: 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. Interpretation: 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. Advantages: More accurate reflection of true economic profit. Encourages efficient use of capital. Useful for comparing companies across industries. Disadvantages: 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 |