What does Economic Value Added (EVA) measure?

Economic Value Added (EVA) measures the surplus value generated by an investment after accounting for the cost of capital. It is a performance metric that reflects the real economic profit of a company, determined by taking the net operating profit after taxes (NOPAT) and subtracting the capital charge, which is the product of the company’s total capital and its cost of capital. This approach helps investors understand whether a business is truly creating value beyond its capital costs.

By focusing on the surplus value, EVA illustrates whether the company's operations are contributing positively to stakeholders and society relative to the capital invested in the business. A positive EVA indicates that the investment generates a return greater than the cost of financing that investment, whereas a negative EVA would suggest the opposite. This makes it a vital metric for assessing the efficiency and effectiveness of management in utilizing company resources to generate wealth.