Economic Value Added (EVA)
Economic Value Added (EVA)
Operating profit after tax minus a charge for the capital used to earn it: NOPAT less WACC times invested capital. Positive EVA means the business earned more than its capital cost; this is also called economic profit or residual income.
When to use: Use to judge whether a business or division creates value after paying for ALL its capital, including equity, which accounting profit ignores. A firm can report growing net income while destroying value on this measure.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| EVA | EVA | Profit after the full cost of capital | $ |
| NOPAT | NOPAT | Net operating profit after tax | $ |
| WACC | WACC | Weighted average cost of capital, as a decimal | % |
| InvestedCapital | Invested Capital | Equity plus interest-bearing debt employed in the business | $ |
Real-Life Examples
Example 1: Value Creator
NOPAT $500M, WACC 9%, invested capital $3,000M.
Given
Step-by-Step
The business earned $230M more than its capital providers required. Its ROIC of 16.7% beats its 9% WACC by 7.7 points on $3B of capital.
Example 2: Profitable but Value-Destroying
NOPAT $150M, WACC 10%, invested capital $2,000M.
Given
Step-by-Step
A $150M profit is a $50M loss once capital is charged for: the business earns 7.5% on capital that costs 10%. Growing it would destroy more value.
Frequently Asked Questions
EVA equals (ROIC − WACC) × invested capital. The spread says whether value is created per dollar of capital; EVA says how many dollars in total.
Net income is after interest, so using it would charge for debt twice. NOPAT is before financing costs, and the WACC charge then covers both debt and equity once.