Management Lesson Series - Economic Value Added (EVA)

Economic Value Added (EVA).

EVA (Stern Stewart & Co., 1980s–90s) measures true economic profit by subtracting the full cost of capital — including the cost of equity, which accounting profit completely ignores — from Net Operating Profit After Tax. Formula: EVA = NOPAT − (Invested Capital × WACC). Example: NOPAT ₹100 Cr, Invested Capital ₹1,000 Cr, WACC 12% → EVA = −₹20 Cr. The business shows accounting profit but destroys ₹20 crore of shareholder value annually. This is EVA's most important insight: a company with positive accounting earnings can simultaneously be destroying shareholder value if its ROIC is below its cost of capital. Three EVA improvement levers: increase NOPAT (margin improvement), reduce invested capital (asset efficiency), reduce WACC (capital structure optimisation). Used by Coca-Cola, Siemens, AT&T, and hundreds of global firms for capital allocation, divisional performance measurement, and executive compensation alignment. Nobel laureate Merton Miller endorsed EVA as the correct measure of corporate performance.

🔔 Source: valuebasedmanagement.net

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