Economic value added
Economic value added is net operating profit after tax minus a capital charge: invested capital multiplied by the weighted average cost of capital. It measures whether a business creates or destroys value above its financing costs.
Also known asEVA
FrameworkEconomic value added (EVA)
See it move
The waterfall chart opens at a net operating profit after tax (NOPAT) of €15,000,000 and deducts a capital charge of €12,000,000 — calculated as €120 million of invested capital at a 10% weighted cost — to land at an EVA of €3,000,000. A positive EVA confirms that the business earned more than the full opportunity cost of the capital it employed; a negative figure would signal value destruction even if accounting profit were positive.
The formula
Variables
- Net operating profit after tax (€)
- Weighted average cost of capital (decimal rate)
- Total capital employed by the division (€)
Positive EVA means the division earned more than the full cost of its financing; negative EVA destroys value