economic value added


  • In accounting, as part of financial statements analysis, economic value added is an estimate of a firm’s economic profit, or the value created in excess of the required return
    of the company’s shareholders.

  • The basic formula is: where: • is the return on invested capital; • is the weighted average cost of capital (WACC); • is the economic capital employed (total assets − current
    liability); • NOPAT is the net operating profit after tax, with adjustments and translations, generally for the amortization of goodwill, the capitalization of brand advertising and other non-cash items.

  • In all three cases, money cost of capital refers to the amount of money rather than the proportional cost (% cost of capital); at the same time, the adjustments to NOPAT are
    unique to EVA.

  • The idea is that value is created when the return on the firm’s economic capital employed exceeds the cost of that capital.

  • Calculation EVA is net operating profit after taxes (or NOPAT) less a capital charge, the latter being the product of the cost of capital and the economic capital.

  • RONA is a ratio that is calculated by dividing a firm’s NOPAT by the amount of capital it employs (RONA = NOPAT/Capital) after making the necessary adjustments to the data
    reported by a conventional financial accounting system.

  • The capital charge is the cash flow required to compensate investors for the riskiness of the business given the amount of economic capital invested.

  • Residual cash flow is another, much older term for economic profit.


Works Cited

[‘1. Mocciaro Li Destri, A.; Picone, P. M.; Minà, A. (2012). “Bringing Strategy Back into Financial Systems of Performance Measurement: Integrating EVA and PBC”. Business System Review. 1 (1): 85–102. SSRN 2154117. Photo credit:’]