What Is Economic Value Added (EVA)?
Economic Value Added (EVA) is a measure of economic profit: what remains after a business pays not only its operating costs but also a fair charge for the capital tied up in it. Accounting profit treats equity as if it were free, so a company can report positive net income while actually destroying value. EVA closes that gap by charging every dollar of invested capital at the firm's weighted average cost of capital.
The metric was developed and trademarked by the consulting firm Stern Stewart & Co., which popularized it in the 1990s as both a performance measure and a basis for executive compensation. Companies including Coca-Cola adopted EVA-linked bonus plans on the logic that managers paid on economic profit behave more like owners of the business.
How to Calculate EVA
The formula is EVA = NOPAT − (Invested Capital × WACC). NOPAT is net operating profit after taxes, calculated as EBIT × (1 − tax rate), and invested capital is the debt and equity funding the operations. Suppose a company produces $150 million of NOPAT on $1 billion of invested capital with a 10 percent WACC: the capital charge is $100 million, so EVA = $150M − $100M = $50 million of value created that year.
Practitioners make adjustments before computing EVA, such as capitalizing research and development spending or adding back non-cash charges, so the accounting figures better reflect economic reality. Stern Stewart cataloged well over a hundred potential adjustments, though most implementations use only a handful. EVA also links tightly to ROIC: EVA is positive exactly when ROIC exceeds WACC.
Why It Matters
EVA reframes performance around the question investors actually care about: is this business earning more than its capital could earn elsewhere? A division can grow revenue and report rising operating income while producing negative EVA if it consumes capital faster than it generates returns. That insight makes EVA a natural tool for capital allocation reviews and for deciding which business lines deserve incremental investment.
For interview preparation, EVA connects several core concepts. It is the dollar-denominated cousin of the ROIC-versus-WACC spread, and the present value of all future EVA equals the value a DCF attributes above invested capital. Walking through the $50 million example above, and explaining why positive net income does not guarantee positive EVA, signals genuine command of corporate finance.
