Definition
EVA measures true economic profit by subtracting the cost of all capital (equity and debt) from after-tax operating profits. Positive EVA indicates value creation; negative EVA indicates value destruction. EVA can be used to evaluate management performance, make investment decisions, and estimate intrinsic value when capitalized into perpetuity.
functions Formula
EVA = NOPAT − (Invested Capital × WACC)
lightbulb Example
NOPAT is $25M, invested capital is $200M, WACC is 10%. EVA = $25M − ($200M × 10%) = $25M − $20M = $5M. The company creates $5M in economic value above its cost of capital.
verified_user Key Points
- Positive EVA = genuine value creation
- Accounts for full cost of both equity and debt capital
- Can be used to estimate intrinsic value
- Aligns management incentives with shareholder value