EVA (economic value added)

EVA (Economic Value Added) is a measure of value creation that compares a company's actual profitability with the cost of all the capital it mobilises. It is calculated by subtracting from operating profit after tax, or Net Operating Profit After Tax (NOPAT), the expected remuneration of capital, equal to invested capital multiplied by the Weighted Average Cost of Capital (WACC).

‍

A positive EVA means the company earns more than the cost of its financing and therefore creates value for its capital providers; a negative EVA signals the opposite. This logic mirrors that of ROIC (return on invested capital) compared with WACC, but expresses it as an absolute amount rather than a percentage, which makes it easier to track value created from one year to the next.

‍

With 3 MCHF of NOPAT, 25 MCHF of invested capital and an 8% WACC, the expected remuneration of capital comes to 2 MCHF, that is 25 multiplied by 8%. EVA therefore stands at 3 minus 2, equal to 1 MCHF: the business creates one million of value beyond the cost of its financing.

‍

In business valuation, EVA extends the logic of the Excess earnings method: a company's value can be seen as the sum of its invested capital and the present value of its future EVA. For an owner, it is also a useful steering tool, refocusing attention on the return on capital rather than on top-line growth alone.