hr: Money

The Economic Value Added Metric (EVA) is a measure of how well a company is able to deliver returns over and above the cost of capital.

Photo Credit: thms.nl

We have already seen in an earlier post, a metric used to assess the position and pricing of a stock, namely the P/E Ratio. Among other things, the P/E ratio is not a static assessment of a stock, and depends heavily on the market assessment of the stock (The ‘P’).

The Economic Value Added Metric (EVA), is more objective that the P/E ratio, and was developed by Stern Stewart & Co. and is their registered trademark.

To find out the EVA, one needs to know the Net Operating Profit after Taxes (NOPAT), and the current cost of capital. EVA is then calculated as: NOPAT - (Cost of Capital) x Total Capital Invested. As you can see, if the company outperforms, the EVA is positive.

This metric is only used for shareholder assessment, and is thus fairly unimportant for anything else. In spite of it’s usefulness however, it is sometimes criticized for giving inaccurate results unless the NOPAT is completely accurate. Inaccuracies can even include not taking into account depreciation, and is therefore hard to be spot on.