Economic value added
Economic value added (EVA) takes into account a firm’s total invested capital when evaluating its financial performance. The final figure is based on subtracting a capital charge – on invested capital – from the firm’s net operating profit after taxes. The final figure can be thought of as the real return investors are getting on their money.
When to use it
- To get an accurate measure of the return a firm has generated, in a given time period, on the capital invested in the firm.
- To uncover opportunities to improve the way a firm uses its invested capital.
The notion that a firm’s true ‘economic profit’ requires an adjustment for its cost of capital dates back at least to the 1960s. The idea waned in popularity ...