Economic Value Added (EVA) - Revision history

User at 17:50, 4 January 2023

2023-01-04T17:50:31Z

User at 19:27, 7 December 2022

2022-12-07T19:27:43Z

User: The LinkTitles extension automatically added links to existing pages (https://github.com/bovender/LinkTitles).

2021-02-06T15:34:59Z

The LinkTitles extension automatically added links to existing pages (https://github.com/bovender/LinkTitles).

User: Economic Value Added (EVA) is an estimate of a firm's economic profit, or the value created in excess of the required return of the company's shareholders. Quite simply, EVA is the net profit less the opportunity cost of the firm's capital.

2018-12-21T19:18:00Z

Economic Value Added (EVA) is an estimate of a firm's economic profit, or the value created in excess of the required return of the company's shareholders. Quite simply, EVA is the net profit less the opportunity cost of the firm's capital.

New page

In corporate finance, Economic Value Added (EVA) is an estimate of a firm's economic profit, or the value created in excess of the required return of the company's shareholders. Quite simply, EVA is the net profit less the opportunity cost of the firm's capital. The idea is that value is created when the return on the firm's economic capital employed exceeds the cost of that capital. This amount can be determined by making adjustments to [[Generally_Accepted_Accounting_Principles_(GAAP)|GAAP]] accounting. There are potentially over 160 adjustments but in practice only several key ones are made, depending on the company and its industry. EVA is a service mark of Stern Value Management.<ref>What is Economic Value Added (EVA)? [https://en.wikipedia.org/wiki/Economic_Value_Added Wikipedia]</ref>

'''Economic Value Added Formula<ref>Economic Value Added (EVA) Formula''' [http://www.investopedia.com/terms/e/eva.asp?layout=infini&v=5A&adtest=5A&ato=3000 Investopedia]</ref> 

The formula for calculating EVA is: [[Net_Operating_Profit_After_Taxes_(NOPAT)|Net Operating Profit After Taxes (NOPAT)]] - [[Invested_Capital|Invested Capital]] * [[Weighted_Average_Cost_of_Capital_(WACC)|Weighted Average Cost of Capital (WACC)]]

The equation above shows there are three key components to a company's EVA: NOPAT, the amount of capital invested and the WACC. NOPAT can be calculated manually but is normally listed in a public company's financials. Capital invested is the amount of money used to fund a specific project. WACC is the average rate of return a company expects to pay its investors; the weights are derived as a fraction of each financial source in a company's capital structure. WACC can also be calculated but is normally provided as public record.

The goal of EVA is to quantify the charge, or cost, for investing capital into a certain project, and then assess whether it is generating enough cash to be considered a good investment. The charge represents the minimum return that investors require to make their investment worthwhile. A positive EVA shows a project is generating returns in excess of the required minimum return.

[[File:EVA.gif|400px|Economic Value Added (EVA)]] 
source: [http://www.investopedia.com/university/eva/eva5.asp Investopedia]

'''Significance of Economic Value Added (EVA)'''<ref>Pros and Cons of EVA [http://www.bms.co.in/pros-and-cons-of-eva/ BMS]</ref> 
The concept of Economic Value Added (EVA) that is gaining popularity globally was found by the Stern & Stewart Company. EVA can be used by corporate to measure the financial performance. Many companies globally seems to have destroyed shareholder’s wealth over a period of time and only a few have positively contributed to their wealth. With the help of Economic Value Added (EVA) which tells what the institution is doing with investor’s hard earned money and it also finds out whether companies have been able to create (or destroy) shareholders wealth. The overriding message is that corporate must always strive to maximize shareholders value without which their stocks (shares) can never be fancied by the market. The EVA analysis helps us to dig below the surface numbers to tell us more about the underlying business and whether there is another case for using EVA as one of the range of performance measurement tools. EVA is a mirror reflection of an organizations true performance. EVA is the invention of Stern Stewart & Co., a global consulting firm, which launched EVA in 1989. EVA is Economic Value Added, a measure of economic profit. EVA is the most misunderstood term among the practitioners of corporate finance. The proponents of EVA are presenting it as the wonder drug of the millennium in overcoming all corporate ills at one stroke and ultimately help in increasing the wealth of the shareholder, which is synonymous with the maximization of the firm value. EVA is nothing but a new version of the age-old residual income concept recognized by economists since the 1770’s. Both EVA and ‘residual income’ concepts are based on the principle that a firm creates wealth for its owners only if it generates surplus over the cost of the total invested capital. Perhaps EVA could bring back the lost focus on ‘economic surplus’ from the current emphasis on accounting profit.

'''Economic Value Added Example''' 
Economic Value Added or EVA is a tool for gauging the real economic performance of a business and its ability to create shareholder value. EVA provides a means for coupling the two fundamental drivers of economic or share holder value– operating earnings and capital efficiency. The EVA Example worksheet details the calculation of EVA over five years for a middle-market manufacturing company operating in a capital intensive industry.

[http://www.exinfm.com/excel%20files/EVA%20Example.xls EVA Example Worksheet]

'''Economic Value Added Template''' 
The EVA Template worksheet provides a simple template for the calculation of EVA from annual financial statement inputs provided by the user. 

[http://www.exinfm.com/excel%20files/EVA%20Example.xls EVA Template Worksheet]

'''Advantages and Disadvantages of Economic Value Added'''<ref>The Advantages and Disadvantages of Economic Value Added (EVA) [https://www.efinancemanagement.com/investment-decisions/economic-value-added-eva-the-measure-of-real-wealth-creation EFinanace Management]</ref> 
*The main advantage of using EVA as a metric for performance appraisal is that it takes into consideration all the costs including the cost of equity capital which is ignored in normal accounting. With this EVA Model, economic profit can be determined.
*The disadvantage is the practicability of the calculations. The first difficulty is in finding a correct cost of equity. It is not suitable for all kinds of companies. It may not correctly understand efficiency as the EVA of a bigger plant will always be more than smaller plant even when they are more efficient and maintain a better ROI comparatively.

'''The Importance of Economic Value Added'''<ref>Economic Value Added (EVA) - Why it Matters [http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/economic-value-added-eva-2925 Investing Answers]</ref> 
Economic Value Added (EVA) is important because it is used as an indicator of how profitable company projects are and it therefore serves as a reflection of management performance. The idea behind EVA is that businesses are only truly profitable when they create wealth for their shareholders, and the measure of this goes beyond calculating net income. Economic value added asserts that businesses should create returns at a rate above their cost of capital. The economic value calculation has many advantages. It succinctly summarizes how much and from where a company created wealth. It includes the balance sheet in the calculation and encourages managers to think about assets as well as expenses in their decisions. However, the seemingly infinite cash adjustments associated with calculating economic value can be time-consuming. And accrual distortions can still affect the measure, particularly when it comes to depreciation and amortization differences. Also, economic value added only applies to the period measured; it is not predictive of future performance, especially for companies in the midst of reorganization and/or about to make large capital investments. The EVA calculation depends heavily on invested capital, and it is therefore most applicable to asset-intensive companies that are generally stable. Thus, EVA is more useful for auto manufacturers, for example, than software companies or service companies with a lot of intangible assets.

===References===
<references />

===Further Reading===
*What is EVA? [http://people.stern.nyu.edu/adamodar/New_Home_Page/lectures/eva.html NYU]
*Summary and Calculation of Economic Value Added (EVA). Abstract[http://www.valuebasedmanagement.net/methods_eva.html Value Based management]
*Economic Value Added and the Measurement of Financial Performance [http://finance.wharton.upenn.edu/~acmack/Chapter_12_app.pdf Upenn]
*Four Steps to Calculating EVA [http://www.exinfm.com/board/four_steps_to_eva.htm Exinfm]
*Should you track Economic Value Added [http://www.inc.com/jeff-haden/what-is-economic-value-added.html Inc.]

@@ Line 1: / Line 1: @@
-In corporate finance, Economic Value Added (EVA) is an estimate of a firm's economic profit, or the value created in excess of the required return of the company's shareholders. Quite simply, EVA is the net profit less the opportunity cost of the firm's capital. The idea is that value is created when the return on the firm's economic capital employed exceeds the cost of that capital. This amount can be determined by making adjustments to [[Generally_Accepted_Accounting_Principles_(GAAP)|GAAP]] accounting. There are potentially over 160 adjustments but in practice, only several key ones are made, depending on the company and its industry. EVA is a service mark of Stern Value Management.<ref>What is Economic Value Added (EVA)? [https://en.wikipedia.org/wiki/Economic_Value_Added Wikipedia]</ref>
+== What is Economic Value Added (EVA)? ==
-'''Economic Value Added Formula<ref>Economic Value Added (EVA) Formula''' [http://www.investopedia.com/terms/e/eva.asp?layout=infini&v=5A&adtest=5A&ato=3000 Investopedia]</ref><br />
+== Economic Value Added Formula<ref>[http://www.investopedia.com/terms/e/eva.asp?layout=infini&v=5A&adtest=5A&ato=3000 Economic Value Added (EVA) Formula]</ref> ==
 The formula for calculating EVA is: Net Operating Profit After Taxes (NOPAT) - Invested Capital * Weighted Average Cost of Capital (WACC)
-The equation above shows there are three key components to a company's EVA: NOPAT, the amount of capital invested and the WACC. NOPAT can be calculated manually but is normally listed in a public company's financials. Capital invested is the amount of money used to fund a specific project. WACC is the average rate of return a company expects to pay its investors; the weights are derived as a fraction of each financial source in a company's capital structure. WACC can also be calculated but is normally provided as public record.
+The equation above shows there are three key components to a company's EVA: NOPAT, the amount of capital invested, and the WACC. NOPAT can be calculated manually but is normally listed in a public company's financials. Capital invested is the amount of money used to fund a specific project. WACC is the average rate of return a company expects to pay its investors; the weights are derived as a fraction of each financial source in a company's capital structure. WACC can also be calculated but is normally provided as a public record.
 The goal of EVA is to quantify the charge, or cost, for investing capital into a certain project, and then assess whether it is generating enough cash to be considered a good investment. The charge represents the minimum return that investors require to make their investment worthwhile. A positive EVA shows a project is generating returns in excess of the required minimum return.
@@ Line 15: / Line 15: @@
-'''Significance of Economic Value Added (EVA)'''<ref>Pros and Cons of EVA [http://www.bms.co.in/pros-and-cons-of-eva/ BMS]</ref><br />
+== Significance of Economic Value Added (EVA)<ref>[http://www.bms.co.in/pros-and-cons-of-eva/ Pros and Cons of EVA]</ref> ==
-The concept of Economic Value Added (EVA) that is gaining popularity globally was found by the Stern & Stewart Company. EVA can be used by corporate to measure the financial performance. Many companies globally seems to have destroyed shareholder’s wealth over a period of time and only a few have positively contributed to their wealth. With the help of Economic Value Added (EVA) which tells what the institution is doing with investor’s hard earned money and it also finds out whether companies have been able to create (or destroy) shareholders wealth. The overriding message is that corporate must always strive to maximize shareholders value without which their stocks (shares) can never be fancied by the market. The EVA analysis helps us to dig below the surface numbers to tell us more about the underlying business and whether there is another case for using EVA as one of the range of performance measurement tools. EVA is a mirror reflection of an organizations true performance. EVA is the invention of Stern Stewart & Co., a global consulting firm, which launched EVA in 1989. EVA is Economic Value Added, a measure of economic profit. EVA is the most misunderstood term among the practitioners of corporate finance. The proponents of EVA are presenting it as the wonder drug of the millennium in overcoming all corporate ills at one stroke and ultimately help in increasing the wealth of the shareholder, which is synonymous with the maximization of the firm value. EVA is nothing but a new version of the age-old residual income concept recognized by economists since the 1770’s. Both EVA and ‘residual income’ concepts are based on the principle that a firm creates wealth for its owners only if it generates surplus over the cost of the total invested capital. Perhaps EVA could bring back the lost focus on ‘economic surplus’ from the current emphasis on accounting profit.
+The concept of Economic Value Added (EVA) that is gaining popularity globally was founded by the Stern & Stewart Company. EVA can be used by corporate to measure financial performance. Many companies globally seem to have destroyed shareholders’ wealth over a period of time and only a few have positively contributed to their wealth. With the help of Economic Value Added (EVA) which tells what the institution is doing with investors’ hard-earned money and it also finds out whether companies have been able to create (or destroy) shareholders' wealth. The overriding message is that corporate must always strive to maximize shareholders' value without which their stocks (shares) can never be fancied by the market. The EVA analysis helps us to dig below the surface numbers to tell us more about the underlying business and whether there is another case for using EVA as one of the ranges of performance measurement tools. EVA is a mirror reflection of an organization's true performance. EVA is the invention of Stern Stewart & Co., a global consulting firm, which launched EVA in 1989. EVA is Economic Value Added, a measure of economic profit. EVA is the most misunderstood term among the practitioners of corporate finance. The proponents of EVA are presenting it as the wonder drug of the millennium in overcoming all corporate ills in one stroke and ultimately helping in increasing the wealth of the shareholder, which is synonymous with the maximization of the firm value. EVA is nothing but a new version of the age-old residual income concept recognized by economists since the 1770s. Both EVA and ‘residual income’ concepts are based on the principle that a firm creates wealth for its owners only if it generates a surplus over the cost of the total invested capital. Perhaps EVA could bring back the lost focus on ‘economic surplus’ from the current emphasis on accounting profit.
-'''Economic Value Added Example'''<br />
+== Economic Value Added Example ==
-Economic Value Added or EVA is a tool for gauging the real economic performance of a business and its ability to create shareholder value. EVA provides a means for coupling the two fundamental drivers of economic or share holder value– operating earnings and capital efficiency. The EVA Example worksheet details the calculation of EVA over five years for a middle-market manufacturing company operating in a capital intensive industry.
+Economic Value Added or EVA is a tool for gauging the real economic performance of a business and its ability to create shareholder value. EVA provides a means for coupling the two fundamental drivers of economic or shareholder value– operating earnings and capital efficiency. The EVA Example worksheet details the calculation of EVA over five years for a middle-market manufacturing company operating in a capital-intensive industry.
 [http://www.exinfm.com/excel%20files/EVA%20Example.xls EVA Example Worksheet]
-'''Economic Value Added Template'''<br />
+== Economic Value Added Template ==
 The EVA Template worksheet provides a simple template for the calculation of EVA from annual financial statement inputs provided by the user.<br />
@@ Line 31: / Line 31: @@
-'''Advantages and Disadvantages of Economic Value Added'''<ref>The Advantages and Disadvantages of Economic Value Added (EVA) [https://www.efinancemanagement.com/investment-decisions/economic-value-added-eva-the-measure-of-real-wealth-creation EFinanace Management]</ref><br />
+== Advantages and Disadvantages of Economic Value Added<ref>[https://www.efinancemanagement.com/investment-decisions/economic-value-added-eva-the-measure-of-real-wealth-creation The Advantages and Disadvantages of Economic Value Added (EVA)]</ref> ==
 *The main advantage of using EVA as a metric for performance appraisal is that it takes into consideration all the costs including the cost of equity capital which is ignored in normal accounting. With this EVA Model, economic profit can be determined.
-*The disadvantage is the practicability of the calculations. The first difficulty is in finding a correct cost of equity. It is not suitable for all kinds of companies. It may not correctly understand efficiency as the EVA of a bigger plant will always be more than smaller plant even when they are more efficient and maintain a better ROI comparatively.
+*The disadvantage is the practicability of the calculations. The first difficulty is in finding a correct cost of equity. It is not suitable for all kinds of companies. It may not correctly understand efficiency as the EVA of a bigger plant will always be more than a smaller plant even when they are more efficient and maintain a better ROI comparatively.
-'''The Importance of Economic Value Added'''<ref>Economic Value Added (EVA) - Why it Matters [http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/economic-value-added-eva-2925 Investing Answers]</ref><br />
+== See Also ==
-Economic Value Added (EVA) is important because it is used as an indicator of how profitable company projects are and it therefore serves as a reflection of management performance. The idea behind EVA is that businesses are only truly profitable when they create wealth for their shareholders, and the measure of this goes beyond calculating net income. Economic value added asserts that businesses should create returns at a rate above their cost of capital. The economic value calculation has many advantages. It succinctly summarizes how much and from where a company created wealth. It includes the balance sheet in the calculation and encourages managers to think about assets as well as expenses in their decisions. However, the seemingly infinite cash adjustments associated with calculating economic value can be time-consuming. And accrual distortions can still affect the measure, particularly when it comes to depreciation and amortization differences. Also, economic value added only applies to the period measured; it is not predictive of future performance, especially for companies in the midst of reorganization and/or about to make large capital investments. The EVA calculation depends heavily on invested capital, and it is therefore most applicable to asset-intensive companies that are generally stable. Thus, EVA is more useful for auto manufacturers, for example, than software companies or service companies with a lot of intangible assets.
+[[Value Creation Index]]
-===References===
+== References ==
 <references />
-===Further Reading===
+== Further Reading ==
-*What is EVA? [http://people.stern.nyu.edu/adamodar/New_Home_Page/lectures/eva.html NYU]
+*[http://people.stern.nyu.edu/adamodar/New_Home_Page/lectures/eva.html What is EVA?]
-*Summary and Calculation of Economic Value Added (EVA). Abstract[http://www.valuebasedmanagement.net/methods_eva.html Value Based management]
+*[http://www.valuebasedmanagement.net/methods_eva.html Summary and Calculation of Economic Value Added (EVA). Abstract]
-*Economic Value Added and the Measurement of Financial Performance [http://finance.wharton.upenn.edu/~acmack/Chapter_12_app.pdf Upenn]
+*[http://finance.wharton.upenn.edu/~acmack/Chapter_12_app.pdf Economic Value Added and the Measurement of Financial Performance]
-*Four Steps to Calculating EVA [http://www.exinfm.com/board/four_steps_to_eva.htm Exinfm]
+*[http://www.exinfm.com/board/four_steps_to_eva.htm Four Steps to Calculating EVA]
-*Should you track Economic Value Added [http://www.inc.com/jeff-haden/what-is-economic-value-added.html Inc.]
+*[http://www.inc.com/jeff-haden/what-is-economic-value-added.html Should you track Economic Value Added]

@@ Line 1: / Line 1: @@
-In corporate finance, Economic [[Value]] Added (EVA) is an estimate of a firm's economic [[profit]], or the value created in excess of the required return of the company's shareholders. Quite simply, EVA is the net profit less the opportunity cost of the firm's [[capital]]. The idea is that value is created when the return on the firm's economic capital employed exceeds the cost of that capital. This amount can be determined by making adjustments to [[Generally_Accepted_Accounting_Principles_(GAAP)|GAAP]] [[accounting]]. There are potentially over 160 adjustments but in practice only several key ones are made, depending on the company and its [[industry]]. EVA is a [[service]] mark of Stern Value [[Management]].<ref>What is Economic [[Value Added]] (EVA)? [https://en.wikipedia.org/wiki/Economic_Value_Added Wikipedia]</ref>
+In corporate finance, Economic Value Added (EVA) is an estimate of a firm's economic profit, or the value created in excess of the required return of the company's shareholders. Quite simply, EVA is the net profit less the opportunity cost of the firm's capital. The idea is that value is created when the return on the firm's economic capital employed exceeds the cost of that capital. This amount can be determined by making adjustments to [[Generally_Accepted_Accounting_Principles_(GAAP)|GAAP]] accounting. There are potentially over 160 adjustments but in practice, only several key ones are made, depending on the company and its industry. EVA is a service mark of Stern Value Management.<ref>What is Economic Value Added (EVA)? [https://en.wikipedia.org/wiki/Economic_Value_Added Wikipedia]</ref>
-'''[[Economic Value]] Added Formula<ref>Economic Value Added (EVA) Formula''' [http://www.investopedia.com/terms/e/eva.asp?layout=infini&v=5A&adtest=5A&ato=3000 Investopedia]</ref><br />
+'''Economic Value Added Formula<ref>Economic Value Added (EVA) Formula''' [http://www.investopedia.com/terms/e/eva.asp?layout=infini&v=5A&adtest=5A&ato=3000 Investopedia]</ref><br />
-The formula for calculating EVA is: [[Net_Operating_Profit_After_Taxes_(NOPAT)|Net Operating Profit After Taxes (NOPAT)]] - [[Invested_Capital|Invested Capital]] * [[Weighted_Average_Cost_of_Capital_(WACC)|Weighted Average Cost of Capital (WACC)]]
+The formula for calculating EVA is: Net Operating Profit After Taxes (NOPAT) - Invested Capital * Weighted Average Cost of Capital (WACC)
 The equation above shows there are three key components to a company's EVA: NOPAT, the amount of capital invested and the WACC. NOPAT can be calculated manually but is normally listed in a public company's financials. Capital invested is the amount of money used to fund a specific project. WACC is the average rate of return a company expects to pay its investors; the weights are derived as a fraction of each financial source in a company's capital structure. WACC can also be calculated but is normally provided as public record.
@@ Line 16: / Line 16: @@
 '''Significance of Economic Value Added (EVA)'''<ref>Pros and Cons of EVA [http://www.bms.co.in/pros-and-cons-of-eva/ BMS]</ref><br />
-The concept of Economic Value Added (EVA) that is gaining popularity globally was found by the Stern & Stewart Company. EVA can be used by corporate to measure the financial performance. Many companies globally seems to have destroyed shareholder’s wealth over a period of time and only a few have positively contributed to their wealth. With the help of Economic Value Added (EVA) which tells what the institution is doing with investor’s hard earned money and it also finds out whether companies have been able to create (or destroy) shareholders wealth. The overriding message is that corporate must always strive to maximize shareholders value without which their stocks (shares) can never be fancied by the [[market]]. The EVA analysis helps us to dig below the surface numbers to tell us more about the underlying [[business]] and whether there is another case for using EVA as one of the range of performance [[measurement]] tools. EVA is a mirror reflection of an organizations true performance. EVA is the invention of Stern Stewart & Co., a global consulting firm, which launched EVA in 1989. EVA is Economic Value Added, a measure of economic profit. EVA is the most misunderstood term among the practitioners of corporate finance. The proponents of EVA are presenting it as the wonder drug of the millennium in overcoming all corporate ills at one stroke and ultimately help in increasing the wealth of the [[shareholder]], which is synonymous with the maximization of the firm value. EVA is nothing but a new version of the age-old residual income concept recognized by economists since the 1770’s. Both EVA and ‘residual income’ concepts are based on the [[principle]] that a firm creates wealth for its owners only if it generates surplus over the cost of the total invested capital. Perhaps EVA could bring back the lost focus on ‘economic surplus’ from the current emphasis on accounting profit.
+The concept of Economic Value Added (EVA) that is gaining popularity globally was found by the Stern & Stewart Company. EVA can be used by corporate to measure the financial performance. Many companies globally seems to have destroyed shareholder’s wealth over a period of time and only a few have positively contributed to their wealth. With the help of Economic Value Added (EVA) which tells what the institution is doing with investor’s hard earned money and it also finds out whether companies have been able to create (or destroy) shareholders wealth. The overriding message is that corporate must always strive to maximize shareholders value without which their stocks (shares) can never be fancied by the market. The EVA analysis helps us to dig below the surface numbers to tell us more about the underlying business and whether there is another case for using EVA as one of the range of performance measurement tools. EVA is a mirror reflection of an organizations true performance. EVA is the invention of Stern Stewart & Co., a global consulting firm, which launched EVA in 1989. EVA is Economic Value Added, a measure of economic profit. EVA is the most misunderstood term among the practitioners of corporate finance. The proponents of EVA are presenting it as the wonder drug of the millennium in overcoming all corporate ills at one stroke and ultimately help in increasing the wealth of the shareholder, which is synonymous with the maximization of the firm value. EVA is nothing but a new version of the age-old residual income concept recognized by economists since the 1770’s. Both EVA and ‘residual income’ concepts are based on the principle that a firm creates wealth for its owners only if it generates surplus over the cost of the total invested capital. Perhaps EVA could bring back the lost focus on ‘economic surplus’ from the current emphasis on accounting profit.
 '''Economic Value Added Example'''<br />
-Economic Value Added or EVA is a tool for gauging the real economic performance of a business and its ability to create shareholder value. EVA provides a means for coupling the two fundamental drivers of economic or share holder value– operating earnings and capital [[efficiency]]. The EVA Example worksheet details the calculation of EVA over five years for a middle-market [[manufacturing]] company operating in a capital intensive industry.
+Economic Value Added or EVA is a tool for gauging the real economic performance of a business and its ability to create shareholder value. EVA provides a means for coupling the two fundamental drivers of economic or share holder value– operating earnings and capital efficiency. The EVA Example worksheet details the calculation of EVA over five years for a middle-market manufacturing company operating in a capital intensive industry.
 [http://www.exinfm.com/excel%20files/EVA%20Example.xls EVA Example Worksheet]
-'''Economic Value Added [[Template]]'''<br />
+'''Economic Value Added Template'''<br />
 The EVA Template worksheet provides a simple template for the calculation of EVA from annual financial statement inputs provided by the user.<br />
@@ Line 32: / Line 32: @@
 '''Advantages and Disadvantages of Economic Value Added'''<ref>The Advantages and Disadvantages of Economic Value Added (EVA) [https://www.efinancemanagement.com/investment-decisions/economic-value-added-eva-the-measure-of-real-wealth-creation EFinanace Management]</ref><br />
-*The main advantage of using EVA as a metric for performance appraisal is that it takes into consideration all the costs including the cost of equity capital which is ignored in normal accounting. With this EVA [[Model]], economic profit can be determined.
+*The main advantage of using EVA as a metric for performance appraisal is that it takes into consideration all the costs including the cost of equity capital which is ignored in normal accounting. With this EVA Model, economic profit can be determined.
 *The disadvantage is the practicability of the calculations. The first difficulty is in finding a correct cost of equity. It is not suitable for all kinds of companies. It may not correctly understand efficiency as the EVA of a bigger plant will always be more than smaller plant even when they are more efficient and maintain a better ROI comparatively.
 '''The Importance of Economic Value Added'''<ref>Economic Value Added (EVA) - Why it Matters [http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/economic-value-added-eva-2925 Investing Answers]</ref><br />
-Economic Value Added (EVA) is important because it is used as an [[indicator]] of how profitable company projects are and it therefore serves as a reflection of management performance. The idea behind EVA is that businesses are only truly profitable when they create wealth for their shareholders, and the measure of this goes beyond calculating net income. Economic value added asserts that businesses should create returns at a rate above their cost of capital. The economic value calculation has many advantages. It succinctly summarizes how much and from where a company created wealth. It includes the balance sheet in the calculation and encourages managers to think about assets as well as expenses in their decisions. However, the seemingly infinite cash adjustments associated with calculating economic value can be time-consuming. And accrual distortions can still affect the measure, particularly when it comes to [[depreciation]] and [[amortization]] differences. Also, economic value added only applies to the period measured; it is not predictive of future performance, especially for companies in the midst of reorganization and/or about to make large capital investments. The EVA calculation depends heavily on invested capital, and it is therefore most applicable to [[asset]]-intensive companies that are generally stable. Thus, EVA is more useful for auto manufacturers, for example, than [[software]] companies or service companies with a lot of intangible assets.
+Economic Value Added (EVA) is important because it is used as an indicator of how profitable company projects are and it therefore serves as a reflection of management performance. The idea behind EVA is that businesses are only truly profitable when they create wealth for their shareholders, and the measure of this goes beyond calculating net income. Economic value added asserts that businesses should create returns at a rate above their cost of capital. The economic value calculation has many advantages. It succinctly summarizes how much and from where a company created wealth. It includes the balance sheet in the calculation and encourages managers to think about assets as well as expenses in their decisions. However, the seemingly infinite cash adjustments associated with calculating economic value can be time-consuming. And accrual distortions can still affect the measure, particularly when it comes to depreciation and amortization differences. Also, economic value added only applies to the period measured; it is not predictive of future performance, especially for companies in the midst of reorganization and/or about to make large capital investments. The EVA calculation depends heavily on invested capital, and it is therefore most applicable to asset-intensive companies that are generally stable. Thus, EVA is more useful for auto manufacturers, for example, than software companies or service companies with a lot of intangible assets.

@@ Line 1: / Line 1: @@
-In corporate finance, Economic Value Added (EVA) is an estimate of a firm's economic profit, or the value created in excess of the required return of the company's shareholders. Quite simply, EVA is the net profit less the opportunity cost of the firm's capital. The idea is that value is created when the return on the firm's economic capital employed exceeds the cost of that capital. This amount can be determined by making adjustments to [[Generally_Accepted_Accounting_Principles_(GAAP)|GAAP]] accounting. There are potentially over 160 adjustments but in practice only several key ones are made, depending on the company and its industry. EVA is a service mark of Stern Value Management.<ref>What is Economic Value Added (EVA)? [https://en.wikipedia.org/wiki/Economic_Value_Added Wikipedia]</ref>
+In corporate finance, Economic [[Value]] Added (EVA) is an estimate of a firm's economic [[profit]], or the value created in excess of the required return of the company's shareholders. Quite simply, EVA is the net profit less the opportunity cost of the firm's [[capital]]. The idea is that value is created when the return on the firm's economic capital employed exceeds the cost of that capital. This amount can be determined by making adjustments to [[Generally_Accepted_Accounting_Principles_(GAAP)|GAAP]] [[accounting]]. There are potentially over 160 adjustments but in practice only several key ones are made, depending on the company and its [[industry]]. EVA is a [[service]] mark of Stern Value [[Management]].<ref>What is Economic [[Value Added]] (EVA)? [https://en.wikipedia.org/wiki/Economic_Value_Added Wikipedia]</ref>
-'''Economic Value Added Formula<ref>Economic Value Added (EVA) Formula''' [http://www.investopedia.com/terms/e/eva.asp?layout=infini&v=5A&adtest=5A&ato=3000 Investopedia]</ref><br />
+'''[[Economic Value]] Added Formula<ref>Economic Value Added (EVA) Formula''' [http://www.investopedia.com/terms/e/eva.asp?layout=infini&v=5A&adtest=5A&ato=3000 Investopedia]</ref><br />
 The formula for calculating EVA is: [[Net_Operating_Profit_After_Taxes_(NOPAT)|Net Operating Profit After Taxes (NOPAT)]] - [[Invested_Capital|Invested Capital]] * [[Weighted_Average_Cost_of_Capital_(WACC)|Weighted Average Cost of Capital (WACC)]]
@@ Line 16: / Line 16: @@
 '''Significance of Economic Value Added (EVA)'''<ref>Pros and Cons of EVA [http://www.bms.co.in/pros-and-cons-of-eva/ BMS]</ref><br />
-The concept of Economic Value Added (EVA) that is gaining popularity globally was found by the Stern & Stewart Company. EVA can be used by corporate to measure the financial performance. Many companies globally seems to have destroyed shareholder’s wealth over a period of time and only a few have positively contributed to their wealth. With the help of Economic Value Added (EVA) which tells what the institution is doing with investor’s hard earned money and it also finds out whether companies have been able to create (or destroy) shareholders wealth. The overriding message is that corporate must always strive to maximize shareholders value without which their stocks (shares) can never be fancied by the market. The EVA analysis helps us to dig below the surface numbers to tell us more about the underlying business and whether there is another case for using EVA as one of the range of performance measurement tools. EVA is a mirror reflection of an organizations true performance. EVA is the invention of Stern Stewart & Co., a global consulting firm, which launched EVA in 1989. EVA is Economic Value Added, a measure of economic profit. EVA is the most misunderstood term among the practitioners of corporate finance. The proponents of EVA are presenting it as the wonder drug of the millennium in overcoming all corporate ills at one stroke and ultimately help in increasing the wealth of the shareholder, which is synonymous with the maximization of the firm value. EVA is nothing but a new version of the age-old residual income concept recognized by economists since the 1770’s. Both EVA and ‘residual income’ concepts are based on the principle that a firm creates wealth for its owners only if it generates surplus over the cost of the total invested capital. Perhaps EVA could bring back the lost focus on ‘economic surplus’ from the current emphasis on accounting profit.
+The concept of Economic Value Added (EVA) that is gaining popularity globally was found by the Stern & Stewart Company. EVA can be used by corporate to measure the financial performance. Many companies globally seems to have destroyed shareholder’s wealth over a period of time and only a few have positively contributed to their wealth. With the help of Economic Value Added (EVA) which tells what the institution is doing with investor’s hard earned money and it also finds out whether companies have been able to create (or destroy) shareholders wealth. The overriding message is that corporate must always strive to maximize shareholders value without which their stocks (shares) can never be fancied by the [[market]]. The EVA analysis helps us to dig below the surface numbers to tell us more about the underlying [[business]] and whether there is another case for using EVA as one of the range of performance [[measurement]] tools. EVA is a mirror reflection of an organizations true performance. EVA is the invention of Stern Stewart & Co., a global consulting firm, which launched EVA in 1989. EVA is Economic Value Added, a measure of economic profit. EVA is the most misunderstood term among the practitioners of corporate finance. The proponents of EVA are presenting it as the wonder drug of the millennium in overcoming all corporate ills at one stroke and ultimately help in increasing the wealth of the [[shareholder]], which is synonymous with the maximization of the firm value. EVA is nothing but a new version of the age-old residual income concept recognized by economists since the 1770’s. Both EVA and ‘residual income’ concepts are based on the [[principle]] that a firm creates wealth for its owners only if it generates surplus over the cost of the total invested capital. Perhaps EVA could bring back the lost focus on ‘economic surplus’ from the current emphasis on accounting profit.
 '''Economic Value Added Example'''<br />
-Economic Value Added or EVA is a tool for gauging the real economic performance of a business and its ability to create shareholder value. EVA provides a means for coupling the two fundamental drivers of economic or share holder value– operating earnings and capital efficiency. The EVA Example worksheet details the calculation of EVA over five years for a middle-market manufacturing company operating in a capital intensive industry.
+Economic Value Added or EVA is a tool for gauging the real economic performance of a business and its ability to create shareholder value. EVA provides a means for coupling the two fundamental drivers of economic or share holder value– operating earnings and capital [[efficiency]]. The EVA Example worksheet details the calculation of EVA over five years for a middle-market [[manufacturing]] company operating in a capital intensive industry.
 [http://www.exinfm.com/excel%20files/EVA%20Example.xls EVA Example Worksheet]
-'''Economic Value Added Template'''<br />
+'''Economic Value Added [[Template]]'''<br />
 The EVA Template worksheet provides a simple template for the calculation of EVA from annual financial statement inputs provided by the user.<br />
@@ Line 32: / Line 32: @@
 '''Advantages and Disadvantages of Economic Value Added'''<ref>The Advantages and Disadvantages of Economic Value Added (EVA) [https://www.efinancemanagement.com/investment-decisions/economic-value-added-eva-the-measure-of-real-wealth-creation EFinanace Management]</ref><br />
-*The main advantage of using EVA as a metric for performance appraisal is that it takes into consideration all the costs including the cost of equity capital which is ignored in normal accounting. With this EVA Model, economic profit can be determined.
+*The main advantage of using EVA as a metric for performance appraisal is that it takes into consideration all the costs including the cost of equity capital which is ignored in normal accounting. With this EVA [[Model]], economic profit can be determined.
 *The disadvantage is the practicability of the calculations. The first difficulty is in finding a correct cost of equity. It is not suitable for all kinds of companies. It may not correctly understand efficiency as the EVA of a bigger plant will always be more than smaller plant even when they are more efficient and maintain a better ROI comparatively.
 '''The Importance of Economic Value Added'''<ref>Economic Value Added (EVA) - Why it Matters [http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/economic-value-added-eva-2925 Investing Answers]</ref><br />
-Economic Value Added (EVA) is important because it is used as an indicator of how profitable company projects are and it therefore serves as a reflection of management performance. The idea behind EVA is that businesses are only truly profitable when they create wealth for their shareholders, and the measure of this goes beyond calculating net income. Economic value added asserts that businesses should create returns at a rate above their cost of capital. The economic value calculation has many advantages. It succinctly summarizes how much and from where a company created wealth. It includes the balance sheet in the calculation and encourages managers to think about assets as well as expenses in their decisions. However, the seemingly infinite cash adjustments associated with calculating economic value can be time-consuming. And accrual distortions can still affect the measure, particularly when it comes to depreciation and amortization differences. Also, economic value added only applies to the period measured; it is not predictive of future performance, especially for companies in the midst of reorganization and/or about to make large capital investments. The EVA calculation depends heavily on invested capital, and it is therefore most applicable to asset-intensive companies that are generally stable. Thus, EVA is more useful for auto manufacturers, for example, than software companies or service companies with a lot of intangible assets.
+Economic Value Added (EVA) is important because it is used as an [[indicator]] of how profitable company projects are and it therefore serves as a reflection of management performance. The idea behind EVA is that businesses are only truly profitable when they create wealth for their shareholders, and the measure of this goes beyond calculating net income. Economic value added asserts that businesses should create returns at a rate above their cost of capital. The economic value calculation has many advantages. It succinctly summarizes how much and from where a company created wealth. It includes the balance sheet in the calculation and encourages managers to think about assets as well as expenses in their decisions. However, the seemingly infinite cash adjustments associated with calculating economic value can be time-consuming. And accrual distortions can still affect the measure, particularly when it comes to [[depreciation]] and [[amortization]] differences. Also, economic value added only applies to the period measured; it is not predictive of future performance, especially for companies in the midst of reorganization and/or about to make large capital investments. The EVA calculation depends heavily on invested capital, and it is therefore most applicable to [[asset]]-intensive companies that are generally stable. Thus, EVA is more useful for auto manufacturers, for example, than [[software]] companies or service companies with a lot of intangible assets.