Why Economic Value Added (EVA) & Value Based Management?
Economic Value Added is the financial performance measure that many argue comes closer than any other to capturing the true economic profit of an enterprise. EVA? also is the performance measure most directly linked to the creation of shareholder wealth over time. The challenge is in effectively implementing an EVA-based financial management and incentive compensation system. The aim is to give managers superior information – and superior motivation – to make decisions that will create the greatest shareholder wealth in any publicly owned or private enterprise. Put most simply, EVA is net operating profit minus an appropriate charge for the opportunity cost of all capital invested in an enterprise. As such, EVA is an estimate of true “economic” profit, or the amount by which earnings exceed or fall short of the required minimum rate of return that shareholders and lenders could get by investing in other securities of comparable risk. EVA = Net Operating Profit After Taxes – [ Capital X
