Economic Value Added (EVA) is a metric that tries to quantify the value a company creates beyond its required return to investors. In simple terms, it compares after-tax operating performance to the opportunity cost of the capital used.
The standard formula is EVA = NOPAT − (WACC × Invested Capital).
This framework emphasizes whether operating earnings cover the cost of the capital employed to generate them.
Analysts and managers may compare EVA across periods or against peers to assess value creation beyond accounting profits. EVA can complement other profitability metrics, such as return on invested capital (ROIC), by highlighting the gap between operating performance and the capital cost embedded in the business.
EVA relies on adjustments to accounting figures (for example, to capitalize or amortize certain items), and estimates of WACC and invested capital can vary. As a result, EVA is one of several tools used to judge value creation rather than a single definitive measure.
If after-tax operating profit is $5 million and invested capital is $40 million with a WACC of 10%, EVA = 5 − (0.10 × 40) = $1 million.
NOPAT · Weighted Average Cost of Capital (WACC) · Invested Capital · Return on Invested Capital (ROIC) · Residual Income · Economic Profit · Capital Allocation