economic value added
A measure of a company's financial performance showing the value created above the required return of shareholders, calculated as net operating profit minus the cost of capital.
Example
“A positive EVA means the company earned more than its cost of capital — creating genuine shareholder value.”
Memory Tip
EVA = profit minus the COST of the capital used. Positive EVA = genuinely creating wealth.
Why It Matters
Economic value added helps investors and business owners understand whether a company is truly creating wealth or merely generating accounting profits. This matters for personal finance because it reveals which companies are efficient with capital and deserve your investment dollars versus those that consume resources without creating real value.
Common Misconception
Many people assume that if a company reports high profits, it is performing well and creating value. However, a company can be profitable while actually destroying shareholder value if those profits do not exceed the cost of capital needed to generate them.
In Practice
Consider a company with a net operating profit of 10 million dollars that uses 100 million dollars in capital. If the cost of capital is 8 percent annually, that is 8 million dollars owed to investors. The economic value added would be 2 million dollars, showing genuine value creation. But if the cost of capital were 12 percent annually, that would be 12 million dollars owed, resulting in negative 2 million dollars economic value added despite the reported profit.
Etymology
ECONOMIC (true financial) VALUE (worth created) ADDED (above cost of capital). True VALUE ADDED above what capital COSTS.
Common Misspellings
Small business accounting made simple
Related Terms
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See Also
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