Economic Value Added, usually the abbreviation EVA is used. It is a term that refers to the currently very important valuation measurement of the enterprise performance. The basic idea of the indicator is that invested capital has to have a greater benefit that the cost of this capital.
The indicator EVA is based on microeconomic business objectives - to maximize the profit, when profit is here understood the economic profit. It expresses the interest of owners and investors. The concept was created in 1993 by the American consulting company Stern Stewart Management Services.
EVA = NOPAT - WACC × C
EVA… Economic Value Added NOPAT… Net Operating Profit After Taxes (NOPAT = EBIT × (1-t)) WACC… Weighted Average Cost of Capital C… total long-term capital invested (C = Liabilities - short-term trade payables) t… income tax rate
EVA > 0 - project value increases, the enterprise creates the value for owners
EVA = 0 - invested value returns without evaluation
MVA < 0 - there is a decline in the value of the enterprise
Decomposition of the EVA indicator:
Use of the EVA in practice: EVA is used to measure the enterprise performance in the direction of maximizing shareholder’s value.