Economic Value Added (EVA) Calculator

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. It's a valuable metric for assessing the value a company generates from the funds invested in it.

Historical Background

EVA is a registered trademark by Stern Value Management, originally developed by Bennett Stewart and Joel Stern in the 1980s. It was introduced as an alternative to traditional financial performance metrics like net income and earnings per share, aiming to provide a clearer picture of corporate and shareholder value.

Calculation Formula

The formula for calculating EVA is:

\[ \text{EVA} = \text{NOPAT} - (\text{WACC} \times \text{Capital Invested}) \]

where:

• \(\text{NOPAT}\) is the Net Operating Profit After Tax,
• \(\text{WACC}\) is the Weighted Average Cost of Capital (expressed as a decimal),
• \(\text{Capital Invested}\) is the total amount of capital invested in the company.

Example Calculation

If a company has a NOPAT of $150,000, a WACC of 10%, and capital invested of $1,000,000, the EVA would be:

\[ \text{EVA} = 150,000 - (0.10 \times 1,000,000) = 150,000 - 100,000 = \$50,000 \]

Importance and Usage Scenarios

EVA is widely used by managers and investors as a gauge of profitability and efficiency, helping in decision-making regarding investments, performance evaluations, and incentive compensation. It emphasizes transparent and value-based management practices.

Common FAQs

1. What does a positive EVA indicate?

   • A positive EVA indicates that a company is generating value over and above the cost of the capital it has employed.

2. How does EVA differ from traditional profit measures?

   • Unlike traditional profit metrics, EVA accounts for the cost of capital, offering a more comprehensive view of a company's financial performance and its ability to create shareholder value.

3. Can EVA be negative?

   • Yes, a negative EVA signifies that a company is not covering its cost of capital, implying it's destroying value.

4. Why include WACC in the calculation?

   • Including WACC accounts for the risk associated with the invested capital, providing a benchmark that the company's NOPAT must exceed to create value.

This calculator facilitates the process of calculating EVA, making it more accessible for financial analysts, investors, and business students to evaluate a company's financial health and operational efficiency.