Economic value added
Economic value added (EVA) is a popular concept used to find out whether an existing or a proposed investment opportunity would positively to the shareholders' wealth. It is a yardstick that measures the com financial performance based on the residual wealth calculated by deducting cost of capital from its operating profit after making adjustments for taxes on a cash basis. It is also known as economic profit as it charges opportunity cost of capital, i.e., whatever returns the best alternative use of the said capital would have yielded. The formula for calculating EVA is as follows:
EVA = Net operating profit after taxes(NOPAT) - (Capital x Cost of capital)
Investment opportunities having positive EVAs increase shareholders' wealth, while those with negative EVAs reduce it. As compared to accounting fits and EPS, EVA is an economic concept and, therefore, requires that businesses must cover both operating costs and capital costs. This concept used setting organizational goals, evaluation of performance of the company, capital budgeting, company valuation, etc.