Definition of Economic Value Added
Economic value added is a measure to assess the company’s performance. It is almost similar to the economic profit which means the true operating profit a company is making. Economic value added or EVA is calculated by deducting the cost of capital invested from the net operating profit after tax.
The formula for Economic Value Added:
EVA = NOPAT – (WACC x Capital Invested)
The term WACC is the weighted average cost of capital that truly reflects the capital structure. Invested capital includes debt and equity and capital leases if any.
The higher the EVA the better the company’s performance is. However, the formula has a disadvantage as it heavily depends on the Invested capital. If the current portion of liabilities is high then the invested capital will be small and the EVA will be higher.