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Economic value added

 

abbr.
extravehicular activity


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Investment Dictionary: Economic Value Added - EVA
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A measure of a company's financial performance based on the residual wealth calculated by deducting cost of capital from its operating profit (adjusted for taxes on a cash basis). (Also referred to as "economic profit".)

The formula for calculating EVA is as follows:

= Net Operating Profit After Taxes (NOPAT) - (Capital * Cost of Capital)

Investopedia Says:
This measure was devised by Stern Stewart & Co. Economic value added attempts to capture the true economic profit of a company.

Related Links:
Looking for a formula to determine whether a company is creating wealth? Time to learn all about Economic Value Added. All About EVA
Discover the simplicity of this important valuation metric. We reveal its underlying ideas and examine each of its components. Understanding Economic Value Added


Accounting Dictionary: Economic Value Added (EVA)
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Variation of Residual Income (RI) that defines the variable in specific ways. EVA = After-tax Income - (Cost of Capital x Capital Invested). The major difference between RI and EVA is that RI uses the market value or book value of assets for the capital invested in the division or firm while EVA uses the market value of total equity and interest-bearing debt.

 
Abbreviations: EVA
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is short for:

Meaning Category
Earned Value AnalysisGovernmental->NASA
Earned Value AssessmentGovernmental->NASA
Earned Value AwardGovernmental->US Government
Economic Value AddedBusiness->Accounting
Electrical Vehicle AssociationGovernmental->Transportation
Electronic Video AgentComputing->Telecom
Emergency Vehicle AlertCommunity->Law
Emergency Voice ActivationCommunity->Law
Emotionally Viable AardvarksMiscellaneous->Funnies
Employed Veterinarians Association (Australia)Medical->Veterinary
Enhanced Visual ApparatusGovernmental->Military
Enterprise Value AddedComputing->Networking
Equine Viral ArteritisMedical->Physiology
Escuadrón De Vigilancia AéreaInternational->Spanish
Espacios Virtuales De AprendizajeInternational->Spanish
Ethylene Vinyl AcetateMiscellaneous->Plastics
Ethylene Vinyl Acetate CopolymerMiscellaneous->Plastics
European Visual ArchiveCommunity->Media
Event Venue Or ActivityCommunity->Sports
Express Value AccountBusiness->Accounting
Business->General
Extra Value AddedBusiness->General
Extra Vehicular ActivityGovernmental->NASA
Governmental->US Government
Extravehicular ActivityGovernmental->NASA

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Wikipedia: Economic value added
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Corporate finance

Panorama clip3.jpg


Working capital management

Cash conversion cycle
Return on capital
Economic value added
Just In Time
Economic order quantity
Discounts and allowances
Factoring (finance)


Capital budgeting

Capital investment decisions
The investment decision
The financing decision


Sections

Managerial finance
Financial accounting
Management accounting
Mergers and acquisitions
Balance sheet analysis
Business plan
Corporate action


Finance series

Financial market
Financial market participants
Corporate finance
Personal finance
Public finance
Banks and Banking
Financial regulation


In corporate finance, Economic Value Added or EVA is an estimate of economic profit, which can be determined, among other ways, by making corrective adjustments to GAAP accounting, including deducting the opportunity cost of equity capital. The concept of EVA is in a sense nothing more than the traditional, commonsense idea of "profit," however, the utility of having a separate and more precisely defined term such as EVA or Residual Cash Flow is that it makes a clear separation from dubious accounting adjustments that have enabled businesses such as Enron to report profits while in fact being in the final approach to becoming insolvent. EVA can be measured as Net Operating Profit After Taxes(or NOPAT) less the money cost of capital. EVA is similar to Residual Income (RI), although under some definitions there may be minor technical differences between EVA and RI (for example, adjustments that might be made to NOPAT before it is suitable for the formula below). Another, much older term for economic value added is Residual Cash Flow. In all three cases, money cost of capital refers to the amount of money rather than the proportional cost (% cost of capital). The amortization of goodwill or capitalization of brand advertising and other similar adjustments are the translations that can be made to Economic Profit to make it EVA. The EVA is a registered trademark by its developer, Stern Stewart & Co.

Contents

Calculating EVA

In the field of corporate finance, Economic Value Added is a way to determine the value created, above the required return, for the shareholders of a company.

The basic formula is:

 \mathit{EVA} \ = \  ( r - c ) \cdot K   \ = \ \mathit{NOPAT} -  c \cdot K

where

 r = {  \mathit{NOPAT} \over K } , called the Return on Invested Capital (ROIC).

is the firm's return on capital, NOPAT is the Net Operating Profit After Tax, c is the Weighted Average Cost of Capital (WACC) and K is capital employed. To put it simply, EVA is the profit earned by the firm less the cost of financing the firm's capital.

Shareholders of the company will receive a positive value added when the return from the capital employed in the business operations is greater than the cost of that capital; see Working capital management. Any value obtained by employees of the company or by product users is not included in the calculations.

Relationship to Market Value Added

The firm's market value added, or MVA, is the discounted sum of all future expected economic value added:

MVA = V - K_0 = \sum_{t=1}^{\infty} { EVA_t \over (1+c)^t }

Note that MVA = NPV of company.

Other measures of shareholder value

See also

References

  • G. Bennett Stewart III (1991). The Quest for Value. HarperCollins. 
  • Erik Stern. The Value Mindset. Wiley. 
  • Joel Stern and John Shiely. The EVA Challenge. Wiley. 
  • Al Ehrbar. EVA, the Real Key to Creating Wealth. Wiley. 

External links


 
 

 

Copyrights:

Dictionary. The American Heritage® Dictionary of the English Language, Fourth Edition Copyright © 2007, 2000 by Houghton Mifflin Company. Updated in 2007. Published by Houghton Mifflin Company. All rights reserved.  Read more
Investment Dictionary. Copyright ©2000, Investopedia.com - Owned and Operated by Investopedia Inc. All rights reserved.  Read more
Accounting Dictionary. Dictionary of Accounting Terms. Copyright © 2005 by Barron's Educational Series, Inc. All rights reserved.  Read more
Abbreviations. STANDS4.com - The source for acronyms and abbreviations. Copyright ©2004-2007 STANDS4 LLC. All rights reserved.  Read more
Wikipedia. This article is licensed under the Creative Commons Attribution/Share-Alike License. It uses material from the Wikipedia article "Economic value added" Read more