Economic Value Added (EVA)

Economic Value Added (EVA) is a financial performance measure that calculates the value created by a company above its cost of capital. EVA is determined by subtracting the company’s cost of capital from its net operating profit after taxes (NOPAT). A positive EVA indicates that the company is generating returns above its cost of capital, creating value for shareholders, while a negative EVA suggests that it is not covering its capital costs. EVA is used by companies to assess the effectiveness of their operations and investment decisions, emphasizing value creation for shareholders.

Example

If a company’s net operating profit after taxes is $1 million and its cost of capital is $800,000, its EVA would be $200,000, indicating positive value creation.