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?

  1. Excellent web site. Lots of helpful information here. I’m sending it to several friends ans additionally sharing in delicious. And of course, thank you to your effort!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s