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Economic Value Added: EVA Is An Estimate of A Firm's Economic Profit - Being

Economic Value Added (EVA) is a measure of a firm's economic profit, which is the net operating profit after taxes minus a capital charge for the opportunity costs of invested capital. EVA is intended to measure the value that a company generates for its shareholders by accounting for the minimum return required by investors. It aims to capture the true economic profit of a company by making adjustments to accounting profits and deducting the opportunity cost of equity capital.

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77 views7 pages

Economic Value Added: EVA Is An Estimate of A Firm's Economic Profit - Being

Economic Value Added (EVA) is a measure of a firm's economic profit, which is the net operating profit after taxes minus a capital charge for the opportunity costs of invested capital. EVA is intended to measure the value that a company generates for its shareholders by accounting for the minimum return required by investors. It aims to capture the true economic profit of a company by making adjustments to accounting profits and deducting the opportunity cost of equity capital.

Uploaded by

Chandan Subudhi
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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ECONOMIC VALUE ADDED

In corporate finance, Economic Value Added or


EVA is an estimate of a firm's economic profit - being
the value created in excess of the required return of
the company's shareholders - where EVA is the profit
earned by the firm less the cost of financing the firm's
capital. The idea is that shareholders gain when the
return from the capital employed is greater than the
cost of that capital; This amount can be determined,
among other ways, by making adjustments to GAAP
accounting, including deducting the opportunity cost
of equity capital
.
 EVA is defined simply :
 Turnover (Sales)
 – Operating expenses (Wages, material,
general exp., depreciation., taxes)
 – Capital costs (WACC x invested
capital)
 Economic Value Added
 CALCULATING EVA

 EVA is Net Operating Profit After Taxes (or NOPAT) less the money cost of capital.
Any value obtained by employees of the company or by product users is not
included in the calculations. The basic formula is:
 EVA=(r-c)*k=NOPAT-c*k
 where:
 “r”=NOPAT/K ,is the Return on Invested Capital (ROIC);
 “c” is the Weighted Average Cost of Capital (WACC);
 “k” is capital employed;
 NOPAT is the Net Operating Profit After Tax, with adjustments and translations for
the amortization of goodwill, the capitalization of brand advertising and others.
 EVA Calculation
 EVA = (r-c) x Capital
 EVA = (r x Capital) – (c x Capital)
 EVA = (NOPAT- c x Capital
 EVA = operating profits – a capital charge
 NOPAT is profits derived from a company’s operations after taxes
but before financing costs and noncash-bookkeeping entries. It is
the total pool of profits available to provide a cash return to those
who provide capital to the firm.
 Capital is the amount of cash invested in the business, net of
depreciation
 Capital charge is the cash flow required to compensate investors
for the riskiness of the business given the amount of capital
invested
 The cost of capital is the minimum rate of return on capital required
to compensate debt and equity investors for bearing risk.
 EVA can be found from a firm’s RETURN ON NET
ASSETS(RONA).It is RONA = NOPAT/Capital(after making
necessary adjustments of the data according to financial
accounting system).EVA =net investments*(RONA-minimum
requirements).if RONA is above the threshold rate ,EVA is positive.
SUMMARY
 EVA is a method to measure a
company’s true profitability and to steer
the company correctly from the point of
shareholders.
 It improves profitability usually through
improved capital turnover.
 EVA is at its best integrated in incentive
system.
USES
 Setting organizational goals
 Performance measurement
 Capital budgeting
 Determining bonuses
 Motivation of the managers
THANK YOU

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