Vadim Kotelnikov    

Economic Value Added (EVA)

A Tool to Measure Efficiency With Which Your Company Uses Its Resources


Vadim Kotelnikov, founder of 1000ventures - personal logo   Business e-Coach  



Economic Value Added (EVA) vs. Earning per Share (EPS)

EPS is calculated by dividing the net profits (after interest, depreciation and taxation) by the number of equity shares issued by the company to find out the profits earned per share. This measure is flawed because it does not consider the equity cost of capital employed (i.e. it assumes that equity capital comes to the company for free). EPS can be improved without corresponding improvement in performance simply by issuing further equity at a premium. Naturally, when more funds are pumped into the company, the size of the business increases without necessary increasing the profitability.

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EVA takes into consideration the total capital employed by the company total shareholders' fund (equity and accumulated profits) and total debt and finds out the difference between the earning and the cost of the capital employed.

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Economic Value Added (EVA) Defined

Economic Value Added (EVA), or economic rent, is a widely recognized tool that is used to measure the efficiency with which a company has used its resources. In other words,

EVA  is the difference between return achieved on resources invested and the cost of resources. Higher the EVA, better the level of resource unitization.

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How EVA Is Calculated

EVA = Net Profit (after tax but before interest) less cost of capital employed (equity + debt).

Interest is not taken as an expense since this is part of cost of capital (interest on debt).

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EVA and Your Company's Market Capitalization

Market Value Added (MVA)   which is the difference between the market value of the company and the total capital invested in the company recognizes the EVA performance of companies. Positive MVA indicates creation of wealth and a positive EVA and vice versa.

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A Revenue Model lays-out the process by which a company actually makes money by specifying how it is going to charge for the services provided... More

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To find and pursue new opportunities you must develop a clear point of view about sustainable growth and make it a part of your company's genetic code.  Leaders that go away from muddling along in a mature industry and toward coming alive with rapid growth prospects identify opportunities, develop selection criteria, select the avenues for profitable growth and pursue opportunities with speed... More

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Case Studies Monsanto

At Monsanto, when it started its transition from a chemical giant to a life sciences company, reward systems have been redesigned to focus on growth and instill a sense of ownership in the corporation. Monsanto granted stock option to the 95% of employees who previously didn't participate in a stock-option program. Economic Value Added (EVA) was adopted as the primary measure of financial performance. Incentive plans are tied to EVA, and employees eligible for management incentives have had a portion of their incentive converted into option... More




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