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## What is EVA?

Economic Value Added (EVA) is a metric of a company's economic performance. EVA allows an investor to measure a value created from investments made into the company by simply calculating the difference between the company's net profit after tax and financing cost.

This value could later be used to compare the company with other companies or investment types.

Unlike other efficiency metrics like ROIROIC or ROCE - Economic Value Added is calculated as an amount value, not a percentage.

Characteristics of EVA

• EVA is a metric of a company's profitability;
• A company is considered profitable if the net profit exceeds the cost of raising capital;
• EVA takes positive or negative value since companies may not always be profitable;
• The result of the EVA calculator is presented as an amount value;
• The EVA is best suited for capital-intensive industries.

This EVA calculator makes it easy to calculate Economic Value Added. You don't need to remember the EVA formula - just fill out the form above and press calculate to find the result.

### Evaluate the performance of your company

The EVA indicator gives a precise answer about a company's profitability. In many cases, the straight answer in dollar amount is much better than percentage value because even a high percentage may translate to a low amount in dollars if the company is small.

### Compare your company with competitors.

You can use the EVA metric to compare your business performance to competitors or industry averages.

If raising capital is crucial to the success of your venture, you should double-check the feasibility of your plan. Leveraged companies tend to grow faster but are at greater risk of bankruptcy.

A good business plan should consider the financing cost and ensure that future margins and profits will cover it.

## How to calculate Economic Value Added?

Calculating Economic Value Added is very simple once you obtain all the needed information.

1. Calculate your Net Profit After Tax by deducting income tax from your net profit.
2. Find out the total value of capital invested in the company.
3. Work out Weighted Average Capital Costs
4. Substitute all the values into the formula below.

### EVA formula

Economic Value Added can be calculated using several formulas, all of which are derived from the standard equation from the EVA definition.

EVA = NOPAT – (Invested capital * WACC)

Where:

• NOPAT - Net Profit After Tax or EBIT
• Invested Capital - The total amount the equity invested into the company
• WACC - Weighted Average Capital Cost is a metric representing average interest expense.

### Alternative EVA formula using EBIT

If you wish to base your calculations on EBIT instead of NOPAT, you may use the following equation:

EVA = EBIT * (1 - tax_rate) - (Invested capital * WACC)

### Example

Let's calculate the Economic Value Added by a hypothetical manufacturing company M Corp Inc.

M Corp Inc. raised \$1,000,000 from the bank in a 6% interest rate loan.

The net profit after tax generated by the company equals \$80,000.

EVA = \$80,000 - \$1,000,000 * 6% = \$20,000

In example above -the investment paid off, and the company has generated profit for the owners.

## Pros and cons of EVA

• EVA gives a clear picture of the company's economic performance;
• EVA takes into account all costs the company needs to cover, while other accounting techniques may ignore;
• It focuses on real profits rather than just net profits.

• EVA may be misleading in the case of companies with a high share of intellectual property, like software companies;
• Since the EVA result is not a ratio but a fixed amount, it is not suited for comparing companies that differ in size.

### Authors

Created by Lucas Krysiak on 2022-06-10 12:27:51 | Last review by Mike Kozminsky on 2022-09-15 13:57:48