What is EVA? Definition

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What is EVA? Definition 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 Profit After Tax minus a charge for the opportunity cost of the capital invested. EVA ( © / ™ Stern Stewart & Co.) is an estimate of the amount that earnings differ from the required minimum rate of return (against comparable risk) for shareholders or lenders. The difference can be both a surplus or a shortage. EVA compared with MVA Unlike Market-based measurements, such as MVA, EVA can be calculated for a divisional (Strategic Business Unit) level. Unlike Equities measurements, EVA is a flow and can be used for performance evaluation over time. EVA compared with EBIT and EPS Unlike accounting profit, such as EBIT, Net Income and EPS, EVA is economic and is based on the idea that a company must cover both the operating costs AND the capital costs. Calculation of EVA. Formula The basic formula for calculating EVA is:       Net Sales –     Operating Expenses ——————————————————       Operating Profit (EBIT) –     Taxes ——————————————————       Net Operating Profit After Tax (NOPAT) –     Capital Charges (Invested Capital x Cost of (more…)