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EVA Model

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Economic Value Added

Calculating Economic Profit with the EVA Model. Abstract

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Stern Stewart & Co.

Calculation of EVA

 

      Net Sales

-    Operating Expenses

---------------------------------------------------------

      Operating Profit (EBIT)

 

-    Taxes

---------------------------------------------------------

      Net Operating Profit After Tax (NOPAT)

 

-    Capital Charges (Invested Capital x Cost of Capital)

---------------------------------------------------------

      Economic Value Added (EVA)

 

Summary

 

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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2014 Value Based Management.net - Last updated: Apr 11, 2014 - All names by their owners