Calculating EVA
Net Sales
-
Operating Expenses
---------------------------------------------------------
Operating Profit (EBIT)
-
Taxes
---------------------------------------------------------
Net Operating Profit After Tax (NOPAT)
-
Capital Charges (Invested Capital x Cost of Capital)
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Economic Value Added (EVA)
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Economic Value Added (EVA) is
a financial performance method to calculate the true economic profit of a
corporation. EVA can be calculated as net
operating after taxes profit minus a charge for the opportunity cost of the capital invested.
EVA
is an estimate of the
amount by which earnings exceed or fall short of the required minimum rate
of return for shareholders or lenders at comparable risk.
Unlike Market-based measures, such as
MVA, EVA can be calculated at divisional
(Strategic Business Unit) level.
Unlike Stock measures,
EVA is a flow and can be used for performance evaluation over time.
Unlike accounting profit, such as
EBIT, Net Income and
EPS, EVA is Economic and is based on the
idea that a business must cover both the operating costs AND the capital
costs.
Usage of the EVA method
EVA
can be used for the following purposes:
- setting
organizational goals
- performance
measurement
- determining bonuses
- communication with
shareholders and investors
- motivation of
managers
- capital budgeting
- corporate valuation
- analyzing equity securities
Book: S. David Young, Stephen F. O'Byrne - EVA and Value-Based Management:
A Practical Guide to Implementation - 
Book: Aswath Damodaran - Investment Valuation: Tools and Techniques for
Determining the Value of Any Asset -
Book: James R. Hitchner - Financial Valuation:
Applications and Models -
Compare with
Economic Value Added:
Market Value Added |
PRVit |
CFROI |
Economic Margin |
CVA |
EBIT |
EBITDA |
Cash Ratio |
Current Ratio |
Return on Equity |
Fair Value |
TSR |
Cash Flow from Operations
|
Dividend Payout Ratio
| Cost-Benefit Analysis
More valuation methodologies
|
Category
Financial Value
Residual Income
Flow
Economic Profit
Books on EVA
Young, O'Byrne, EVA and VBM
Stern, The EVA Challenge: Implementing Value Added
Change...
Copeland, Valuation: Measuring and Managing the
Value of Companies
Grant, Foundations of EVA
Ferris, Valuation: Avoiding the Winner's Curse
Madden, CFROI Valuation
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Summaries of 2,000 management methods