What Is Economic Value Added (EVA)?
Economic Value Added (EVA) is a measure of a company's true economic profit. Unlike accounting profit, EVA subtracts the full cost of all capital employed — including equity — from operating profit. A positive EVA means the business is generating returns above what its investors require; a negative EVA signals that the company is destroying value even if it reports an accounting profit.
How to Use This Calculator
Enter three figures: NOPAT (Net Operating Profit After Tax), the total Invested Capital (debt plus equity tied up in operations), and your WACC (Weighted Average Cost of Capital) as a percentage. The calculator multiplies invested capital by WACC to get the capital charge, then subtracts it from NOPAT to reveal your EVA.
The Formula Explained
$$\text{EVA} = \text{NOPAT} - (\text{Invested Capital} \times \text{WACC})$$ NOPAT reflects after-tax operating earnings before financing costs. The capital charge represents the minimum return investors expect on the money committed to the firm. Anything earned above that charge is genuine wealth creation.
Worked Example
Suppose a company has NOPAT of $500,000, Invested Capital of $3,000,000, and a WACC of 10%. The capital charge is $$\$3{,}000{,}000 \times 0.10 = \$300{,}000$$ $$\text{EVA} = \$500{,}000 - \$300{,}000 = \$200{,}000$$ The firm created $200,000 of value above its cost of capital.
FAQ
What does a negative EVA mean? It means the company earned less than the cost of the capital it used, eroding shareholder value despite possibly showing an accounting profit.
How is NOPAT calculated? \(\text{NOPAT} = \text{Operating Income} \times (1 - \text{Tax Rate})\). It strips out financing effects to isolate operating performance.
Is EVA the same as residual income? Conceptually yes — EVA is a refined form of residual income that often applies accounting adjustments to capital and profit before computing the charge.
