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What Is Economic Value Added (EVA)?

3PL Glossary > Economic Value Added (EVA)

Economic Value Added (EVA) Definition | TLDR

Economic value added (EVA) is a financial performance metric that measures a company's profitability by calculating the excess of its net operating profit after tax (NOPAT) over its cost of capital, indicating how much value a company has created for its shareholders.

Economic Value Added (EVA) Meaning

Economic value added (EVA) is a financial performance metric that seeks to measure a company's true economic profit by deducting its cost of capital from its net operating profit after taxes (NOPAT). The concept was developed by management consultant Stern Stewart & Co., and it is designed to provide a more accurate assessment of a company's profitability than traditional accounting metrics.

What Are the 4 Steps in Calculating EVA?

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Economic value added (EVA) is a financial performance metric that seeks to measure a company's true economic profit by deducting its cost of capital from its net operating profit after taxes (NOPAT). The concept was developed by management consultant Stern Stewart & Co., and it is designed to provide a more accurate assessment of a company's profitability than traditional accounting metrics.

EVA is considered a valuable financial metric because it aligns the interests of shareholders with the company's management. Companies that consistently achieve positive EVA are seen as creating value for shareholders, while those with negative EVA may be destroying shareholder value. This metric is often used by investors and analysts to evaluate a company's overall financial performance and efficiency in utilizing its capital resources.

FAQs

No, EVA differs from traditional accounting profit as it deducts the cost of capital to provide a more accurate measure of a company's economic profit.

Not necessarily. While negative EVA may suggest that a company is not earning enough to cover its cost of capital, it requires further analysis to understand the specific circumstances and potential for improvement.

Yes, EVA is a metric commonly used to evaluate how efficiently a company utilizes its capital resources.

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