James Chen, CMT is an expert trader, investment adviser, and global market strategist. He has authored books on technical analysis and foreign exchange trading published by John Wiley and Sons and served as a guest expert on CNBC, BloombergTV, Forbes, and Reuters among other financial media.” data-inline-tooltip=”true”>James Chen
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Kirsten Rohrs Schmitt is an accomplished professional editor, writer, proofreader, and fact-checker. She has expertise in finance, investing, real estate, and world history. Throughout her career, she has written and edited content for numerous consumer magazines and websites, crafted resumes and social media content for business owners, and created collateral for academia and nonprofits. Kirsten is also the founder and director of Your Best Edit; find her on LinkedIn and Facebook.
What Is Economic Value Added (EVA)?
Economic value added (EVA) is a measure of a company”s financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis. EVA can also be referred to as economic profit, as it attempts to capture the true economic profit of a company. This measure was devised by management consulting firm Stern Value Management, originally incorporated as Stern Stewart & Co.
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Economic value added (EVA), also known as economic profit, aims to calculate the true economic profit of a company.EVA is used to measure the value a company generates from funds invested in it.However, EVA relies heavily on invested capital and is best used for asset-rich companies, where companies with intangible assets, such as technology businesses, may not be good candidates.
Understanding Economic Value Added (EVA)
EVA is the incremental difference in the rate of return (RoR) over a company”s cost of capital. Essentially, it is used to measure the value a company generates from funds invested in it. If a company”s EVA is negative, it means the company is not generating value from the funds invested into the business. Conversely, a positive EVA shows a company is producing value from the funds invested in it.