In corporate finance, Economic Value Added or EVA, a registered trademark of Stern Stewart & Co., is an estimate of a firm's economic profit – being the value created in excess of the required return of the company's investors (being shareholders and debt holders). Quite simply, EVA is the profit earned by the firm less the cost of financing the firm's capital. The idea is that value is created when the return on the firm's economic capital employed is greater than the cost of that capital; see Corporate finance: working capital management. This amount can be determined by making adjustments to [[GAAP]] accounting. There are potentially over 160 adjustments that could be made but in practice only five or seven key ones are made, depending on the company and the industry it competes in.

Calculating EVA

EVA is net operating profit after taxes (or NOPAT) less a capital charge, the latter being the product of the cost of capital and the economic capital. The basic formula is:

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

where:

$\Large r $= ${\LARGE \mathit{NOPAT} \over K }$ , is the Return on Invested Capital (ROIC);
$\Large c \$, is the weighted average cost of capital (WACC);
$\Large K \$, is the economic capital employed;
$\Large NOPAT$ is the net operating profit after tax, with adjustments and translations, generally for the amortization of goodwill, the capitalization of brand advertising and others non-cash items.

Source: http://en.wikipedia.org/wiki/Economic_Value_Added
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finance_public
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Sat, 08 Oct 2011 09:38:38 GMT
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dirkjan
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Sat, 08 Oct 2011 09:38:38 GMT
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dirkjan
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dirkjan