The Economic Value Added (EVA) is the difference between the firm's after-tax return on capital and its cost of capital. It has received a good amount of interest in recent years.

Traditional approaches for measuring "Shareholders' Value Creation" have used parameters such as earnings capitalization, market capitalization and present value of estimated future cash flows. Extensive equity research has now established that it is not earnings per se, but Value which is important. A new measure called "Economic Value Added" (EVA), developed by Stern Stewart & Company, is increasingly being applied to understand and evaluate financial performance. In its simplest form, the EVA is the difference between the firm's after-tax return on capital and its cost of capital.

EVA has received a good amount of interest in recent years. The main distinction between EVA and Net Profits, as reported in the P&L statement, is that "Net Profits" does not make an adjustment for the equity capital used. So a company, while making accounting profits, might still be destroying value from a shareholder perspective when the returns are lower in relation to the capital used. By incorporating the cost of equity, EVA claims to measure the amount by which profits exceed or fall short of the capital.

MBA Review Magazine, Economic Value Added, EVA, Market Capitalization, Decision-making Process, Financial Management System, Shareholder Investments, Business Model, Efficient Market Hypothesis, Net Present Value, NPV, Earnings Per Share, EPS, Return on Capital Employed, ROCE, Management Decisions, Accounting Profits.