THERE ARE SEVERAL definitions of EVA that have been carved out by different economists and economics experts.  However, it should be noted that it’s really only language of expression that is different—the point still remains the same.  EVA is an acronym for Economic Value Added.  The precise definition of Economic Value Added refers to the measure of the financial performance of a company, based on its residual wealth.  EVA is calculated through the deduction of the cost of the company's capital from the operating profit.  However, adjustments can be made to it on a cash basis for the taxes.  EVA is also known as “economic profit.”

 

Since EVA is obtained through calculations, it has a formula that can be used to make the work much easier.  In calculating EVA, the following formula is applied:

 

            EVA = Net Operating Profit After Taxes – Capital.

 

To date, it can be said that most people in the commercial industry are well informed of EVA.  However, this can be attributed to intensive marketing and deployment efforts of the company that invented it.  Thus, EVA is a registered trademark of that company.

 

EVA is justified by a number of many theories in finance and also the valuation of principles.  In fact, these two are some of the vital tools that an investor needs to be able to analyze the performance of a company.  If EVA still sounds too complex to you, believe me that you’re not alone.  However, the main basis of EVA lies on the principle that cash is always superior.  For you to be able to examine the components and calculation of EVA, there needs to be an understanding of the underlying principles.

 

EVA can be applied in various ways in a company.  The significance of the application of EVA is mainly aimed at ensuring the productivity of the company.  This is based on the measures that the company will use in widening its financial base.  Some of the ways that EVA can be applied include:

 

 

For a company to be able to know how to apply EVA, the managers have to be able to also understand Return on Investment (ROI).  This metric was introduced to assist in the evaluation of the success of a company.  This evaluation is conducted through the comparison of the company's operating income to the capital invested.  However, for success, the company should be able to improve ROI.  The improvement can be done in two ways.  A company can increase the value of the profit margin that is earned in every sales dollar, or by increasing its asset turnover.