What is Economic Value Added?

According to corporate finance, the concept of Economic Value Added (also known by the acronym of EVA™) is the estimate of a firm’s economic profit.  In other words, it is the value above the return expected by investors.

The return expected by investors is commonly referred to as cost of capital, which is the combination of the interest of the company’s debt obligations and return provided to equity shareholders.  The total of Economic Value Added is calculated by making adjustments to the company’s financial statements.

Although the benefits of Economic Value Added justify its use for a quick valuation of the company, it is not one of the three common approaches used in market valuation (specifically income, sales comparison and replacement cost).

In summary, accounting profit is easily adjusted to show results that may not account for the total operation results of the business; however, the calculation of Economic Value Added not only provides a quick valuation measure but also is a more precisely defined calculation.

Always make sure that you make an informed decision in all cases,

All the Best,

The Capital Corp Team


One thought on “What is Economic Value Added?

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