Economic value added

In accounting, as part of financial statements analysis, economic value added (EVA) is an estimate of a firm's economic profit, or the value created in excess of the required return of the company's shareholders. EVA is the net profit less the capital charge ($) for raising the firm's capital. The idea is that value is created when the return on the firm's economic capital employed exceeds the cost of that capital, and equally if the return is less than the cost of capital, the firm is operating at a loss. The value of EVA can be determined by making adjustments to GAAP accounting. There are potentially over 160 adjustments, although in practice several key ones are mainly made, depending on the company and its industry. EVA is calculated as net operating profit after taxes (NOPAT) less a capital charge, the latter being the product of the cost of capital and the economic capital. The basic formula is: where: EVA calculation: EVA = net operating profit after taxes – a capital charge [the residual income method] therefore EVA = NOPAT – (c × capital), or alternatively where NOPAT is profits derived from a company's operations after cash taxes but before financing costs and non-cash bookkeeping entries. It is the total pool of profits available to provide a cash return to those who provide capital to the firm. Capital is the amount of cash invested in the business, net of depreciation. It can be calculated as the sum of interest-bearing debt and equity or as the sum of net assets less non-interest-bearing current liabilities (NIBCLs).