Saturday, September 1, 2007

EVA Economic Value Added Introduction

EVA doesn't just stand for Extra-Vehicular Activity. It is also a series of letters that stands for Economic Value Added. I just learned about this term a few days ago, so excuse me if I get any of the following information wrong. This is my introduction to you for EVA.

Economic Value Added takes into account not only ordinary accounting costs, but also the opportunity costs of doing business. When a company chooses to make an investment in one place, it is unable to make an investment elsewhere. Therefore, a EVA measures a firm's ability to earn a profit over the required rate of return in the market.

This is the calculation you would want to follow to find EVA:If you think about it, a company could simply close up shop, liquidate the remains, and give that money to shareholders for use in more profitable ventures. The reason they don't is because the firm provides (or is expected to provide) a greater return than the rest of the market. Using EVA to compare companies can be one measure of how well a firm is doing.

For more information about Economic Value Added, check out these links:
"What Is EVA" by Stern Stewart & Co.
"EVA vs ROE" by Loi Tran

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----------Sincerely, Trevor Stasik

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