What does the concept of economic value added (EVA) measure?

Economic value added (EVA) is a financial performance measure that assesses a company's profitability after accounting for the cost of capital. It reflects the residual income attributable to shareholders after all capital costs, making it a powerful tool for evaluating the true economic profit a company generates. Essentially, EVA is calculated by taking the net operating profit after taxes (NOPAT) and subtracting the capital charge, which is the cost of capital multiplied by the capital employed. This provides insights into whether the company is generating enough income to cover the cost of all its investors, including both equity and debt holders.

By focusing on the residual income, EVA helps stakeholders understand whether the company is creating value beyond what is required to meet the expectations of its investors. This makes it a crucial measure for performance management, as it aligns the company's operational objectives with shareholder value creation.