Economic Value Added (EVA) Calculator
Economic Value Added (EVA) is a measure of a company's financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis. It represents the value created for shareholders above the required return on their invested capital.
Enter the **Net Operating Profit After Tax (NOPAT)**, **Capital Invested**, and **Weighted Average Cost of Capital (WACC)** to calculate the EVA.
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Understanding Economic Value Added (EVA) & Formula
What is EVA?
Economic Value Added (EVA), a concept popularized by Stern Stewart & Co., is a financial metric that attempts to measure the true economic profit of a company. Unlike traditional accounting profit (like Net Income), EVA considers the cost of *all* the capital used by the company, including equity capital. If a company's NOPAT is greater than the cost of the capital it employs, it has created value (positive EVA). If NOPAT is less than the capital cost, it has destroyed value (negative EVA).
EVA Formula
The core EVA formula is:
EVA = NOPAT - (Capital Invested × WACC)
Where:
- NOPAT (Net Operating Profit After Tax): The company's profit from operations after deducting cash taxes, but before accounting for financing costs. This is often adjusted from standard Net Income to remove non-operating items and align with cash taxes.
- Capital Invested (or Capital Employed): The total amount of capital (debt, equity, etc.) the company uses in its operations. This can be calculated in various ways (e.g., Total Assets minus Non-Interest Bearing Current Liabilities, or Book Value of Debt + Book Value of Equity).
- WACC (Weighted Average Cost of Capital): The average rate of return a company expects to pay to all its security holders (debt and equity holders) to compensate them for the risk of their investment. It's a weighted average of the cost of debt and the cost of equity.
The term `Capital Invested × WACC` is also known as the **Capital Charge** or the **Required Return on Capital**. It represents the minimum profit needed to satisfy all capital providers.
EVA Examples
Click on an example to see the calculation:
Example 1: Profitable Company (Positive EVA)
Scenario: A company generates significant profit relative to its capital cost.
1. Known Values: NOPAT = $500,000, Capital Invested = $2,500,000, WACC = 15%.
2. Capital Charge: Capital Invested × WACC = $2,500,000 × (15 / 100) = $375,000.
3. EVA Calculation: EVA = NOPAT - Capital Charge = $500,000 - $375,000.
4. Result: EVA = $125,000.
Conclusion: The company has a positive EVA ($125,000), indicating it created wealth above the cost of its capital.
Example 2: Unprofitable Company (Negative EVA)
Scenario: A company's operating profit is less than the required return on its capital.
1. Known Values: NOPAT = $80,000, Capital Invested = $1,200,000, WACC = 10%.
2. Capital Charge: Capital Invested × WACC = $1,200,000 × (10 / 100) = $120,000.
3. EVA Calculation: EVA = NOPAT - Capital Charge = $80,000 - $120,000.
4. Result: EVA = -$40,000.
Conclusion: The company has a negative EVA (-$40,000), indicating it destroyed wealth relative to the cost of its capital.
Example 3: Breaking Even (Zero EVA)
Scenario: A company's operating profit exactly covers the cost of its capital.
1. Known Values: NOPAT = $250,000, Capital Invested = $2,000,000, WACC = 12.5%.
2. Capital Charge: Capital Invested × WACC = $2,000,000 × (12.5 / 100) = $250,000.
3. EVA Calculation: EVA = NOPAT - Capital Charge = $250,000 - $250,000.
4. Result: EVA = $0.
Conclusion: The company has a zero EVA, meaning it earned just enough to cover the cost of its capital, neither creating nor destroying wealth.
Example 4: High Profit, High Capital (Negative EVA)
Scenario: A company has a high NOPAT but requires a very large amount of expensive capital.
1. Known Values: NOPAT = $1,000,000, Capital Invested = $15,000,000, WACC = 8%.
2. Capital Charge: Capital Invested × WACC = $15,000,000 × (8 / 100) = $1,200,000.
3. EVA Calculation: EVA = NOPAT - Capital Charge = $1,000,000 - $1,200,000.
4. Result: EVA = -$200,000.
Conclusion: Despite a $1M operating profit, the cost of capital ($1.2M) is higher, resulting in negative EVA. This highlights that profitability must exceed capital costs to create value.
Example 5: Low Profit, Low Capital (Positive EVA)
Scenario: A company with relatively low operating profit but very efficient use of inexpensive capital.
1. Known Values: NOPAT = $50,000, Capital Invested = $400,000, WACC = 10%.
2. Capital Charge: Capital Invested × WACC = $400,000 × (10 / 100) = $40,000.
3. EVA Calculation: EVA = NOPAT - Capital Charge = $50,000 - $40,000.
4. Result: EVA = $10,000.
Conclusion: Even with a modest operating profit ($50k), the company creates positive EVA ($10k) because its capital is relatively inexpensive compared to its earnings.
Example 6: Company with Operating Loss (Negative NOPAT)
Scenario: A company has an operating loss after tax.
1. Known Values: NOPAT = -$100,000 (a loss), Capital Invested = $500,000, WACC = 11%.
2. Capital Charge: Capital Invested × WACC = $500,000 × (11 / 100) = $55,000.
3. EVA Calculation: EVA = NOPAT - Capital Charge = -$100,000 - $55,000.
4. Result: EVA = -$155,000.
Conclusion: An operating loss directly contributes to negative EVA. The cost of capital further adds to the value destruction.
Example 7: Project Evaluation using EVA
Scenario: Evaluate a new project expected to generate NOPAT with specific capital requirements.
1. Known Values: Expected Project NOPAT = $75,000, Project Capital Invested = $600,000, Company WACC = 13%.
2. Capital Charge: Project Capital Invested × WACC = $600,000 × (13 / 100) = $78,000.
3. EVA Calculation: EVA = Expected Project NOPAT - Capital Charge = $75,000 - $78,000.
4. Result: EVA = -$3,000.
Conclusion: Based on this simple EVA model, the project is expected to destroy $3,000 in value, suggesting it may not be economically viable unless NOPAT can be increased or capital cost reduced.
Example 8: Small Business EVA
Scenario: Calculating EVA for a smaller company.
1. Known Values: NOPAT = $90,000, Capital Invested = $750,000, WACC = 10%.
2. Capital Charge: Capital Invested × WACC = $750,000 × (10 / 100) = $75,000.
3. EVA Calculation: EVA = NOPAT - Capital Charge = $90,000 - $75,000.
4. Result: EVA = $15,000.
Conclusion: The small business is creating positive economic value ($15,000) for its owners.
Example 9: Impact of Improving Efficiency
Scenario: A company reduces its required capital while maintaining NOPAT.
1. Initial Values: NOPAT = $200,000, Capital Invested = $1,500,000, WACC = 12%.
1a. Initial Capital Charge: $1,500,000 × 12% = $180,000.
1b. Initial EVA: $200,000 - $180,000 = $20,000.
2. After Improvement: NOPAT remains $200,000, New Capital Invested = $1,300,000, WACC = 12%.
2a. New Capital Charge: $1,300,000 × 12% = $156,000.
2b. New EVA Calculation: EVA = $200,000 - $156,000.
3. Result: New EVA = $44,000.
Conclusion: By reducing capital requirements from $1.5M to $1.3M while keeping NOPAT and WACC constant, EVA increased from $20,000 to $44,000, demonstrating the value of capital efficiency.
Example 10: Impact of Lowering Capital Cost
Scenario: A company refinances debt, lowering its WACC.
1. Initial Values: NOPAT = $300,000, Capital Invested = $2,000,000, WACC = 10%.
1a. Initial Capital Charge: $2,000,000 × 10% = $200,000.
1b. Initial EVA: $300,000 - $200,000 = $100,000.
2. After Refinancing: NOPAT remains $300,000, Capital Invested remains $2,000,000, New WACC = 8%.
2a. New Capital Charge: $2,000,000 × 8% = $160,000.
2b. New EVA Calculation: EVA = $300,000 - $160,000.
3. Result: New EVA = $140,000.
Conclusion: By lowering the cost of capital from 10% to 8% while keeping NOPAT and Capital constant, EVA increased from $100,000 to $140,000, showing how managing financing costs impacts value creation.
Frequently Asked Questions about EVA
1. What is Economic Value Added (EVA)?
EVA is a measure of a company's true economic profit after accounting for the cost of all capital, including equity. It shows whether a company's operations are generating returns above the minimum required by its investors.
2. How is EVA calculated?
The basic formula is: EVA = NOPAT - (Capital Invested × WACC).
3. What do NOPAT, Capital Invested, and WACC stand for?
NOPAT: Net Operating Profit After Tax. Profit from core operations after cash taxes, before financing costs.
Capital Invested: Total capital used in the business (debt + equity, often with adjustments).
WACC: Weighted Average Cost of Capital. The average rate a company pays to its investors for the use of their capital.
4. What does a positive EVA indicate?
A positive EVA means the company's NOPAT is greater than its capital charge. This indicates that the company is creating value for its shareholders above the required return on their invested capital.
5. What does a negative EVA indicate?
A negative EVA means the company's NOPAT is less than its capital charge. This indicates that the company is destroying value, as its operating profit is not sufficient to cover the cost of the capital it employs.
6. Why is EVA considered a better performance measure than Net Profit?
Traditional Net Profit does not explicitly subtract the cost of equity capital. EVA accounts for the cost of *all* capital (both debt and equity), providing a more comprehensive view of whether the company is truly generating value above the minimum required by all capital providers.
7. What is Capital Charge?
Capital Charge is the minimum return required on the capital invested in the business. It is calculated as Capital Invested multiplied by the Weighted Average Cost of Capital (Capital Invested × WACC). It represents the opportunity cost of the capital used.
8. Can WACC be negative?
Theoretically possible but highly unusual in practice. WACC represents the cost of financing. A negative cost would imply investors are paying the company to use their money, which is not typical under normal market conditions.
9. How is EVA used in practice?
EVA is used by companies for internal performance measurement, setting performance targets, calculating bonuses (EVA-based compensation), capital budgeting decisions (prioritizing projects that generate positive EVA), and communicating value creation to shareholders.
10. Are there complexities or adjustments to NOPAT and Capital Invested in real-world EVA calculations?
Yes. Calculating true EVA often involves making numerous adjustments (sometimes dozens) to standard GAAP or IFRS accounting figures for NOPAT and Capital Invested. These adjustments aim to convert accounting profit and book values into figures closer to economic profit and market values, eliminating distortions from accounting conventions (e.g., expensing R&D, depreciation methods, treatment of leases). The calculator here uses the basic, unadjusted figures as inputs for simplicity.
