economic value added


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Economic value added (EVA)

A method of performance evaluation that adjusts accounting performance for investors' required return on investment. Suppose a division produces a 12% return on capital invested. Given the risk of the division's business line, if investors would usually require 14% on capital invested for this level of risk, the division destroyed shareholder value by the EVA metric. This Stern-Stewart has a trade mark on this term.

Economic Value Added

A company's after-tax earnings less its opportunity cost. The economic value-added measure is a metric of how well it has performed over a given period of time compared to how it could have performed.

economic value added (EVA)

a measure of a firm's overall profit (loss) position when allowance is made for the OPPORTUNITY/ECONOMIC COSTS of the firm's capital (that is, the revenues the firm's assets could have earned in some alternative use). Whereas accounting PROFIT = SALES REVENUE less accounting COSTS (see PROFIT AND LOSS ACCOUNT), EVA = sales revenue less accounting cost less opportunity economic costs.

To illustrate: assume sales revenue is £1,000,000 and accounting cost is £900,000; on conventional criteria the firm thus makes an accounting profit of £100,000. However, when allowance is made for the opportunity cost of the firm's assets if liquidated and redeployed in an alternative use the picture changes. If the firm's assets could have earned, say, £200,000 in some alternative activity (e.g. even putting the money on interest-bearing deposit with a bank) then the positive accounting profit is turned into an economic loss of £100,000. Thus, shareholders' wealth has been ‘destroyed’ rather than ‘created’.

However, whilst producing accurate accounting cost and profit data can be difficult, obtaining reliable economic cost and profit data can be even more problematic. For example, a high proportion of the investment in the firm's current activity may represent a ‘sunk’ cost with little prospect of recovery if liquidated, while there is a difficulty in identifying which are likely to be viable alternative activities where the firm's new investment might yield higher profit returns than currently being achieved.

References in periodicals archive ?
According to the aforementioned study, the main study objectives are reviewing and explaining the relationship between the cash conversion cycle and economic value added in Tehran Stock Exchange.
The analysis shows that in the Indian stock market Economic Value Added is associated with stock returns and outperforms all other performance measures under examination (EPS, Dividend Per Share, ROI, ROE, Nl, and OP AND ROA) in explaining stock returns for maximum cases.
The newest evaluation metric is Economic Value Added, commonly referred to as "EVA," which is a registered trademark of Stern Stewart & Company, the New York consulting firm which developed this tool.
The first peripheral hypothesis: There is a significant relationship between earning quality and economic value added.
Economic value added is a measure is used for overall supervision, in value creation, the company.
The economic benefits of the project s investments will derive from a net increase in the economic value added, which will occur as a result of existing activities being undertaken at a higher productivity level, and also as a result of new activities that are expected to boost the overall productive capacity of the sectors.
For example, Economic Value Added (EVA), a financial system that measures how - and if a company creates shareholder wealth, was debated in a CE article earlier this year (CE: January/February 1996).
Rackspace adopted Economic Value Added (EVA) in 2005 to focus the company on creating sustainable shareholder value.
Some seven ongoing jobs will be generated when the hub is operational, and Golden Plains Shire Council believes that the project will benefit the regional economy on multiple levels, including significant increases in demand for goods and services, employment, and economic value added.
The new product supports frameworks such as Stem Stewart's economic value added (EVA"), through a special contractual arrangement with Stem Stewart, as well as the Balanced Scorecard and Andersen's Value Dynamics'.
Economic Value Added is the most meaningful of the lot.
QuickPay will allow these organizations to drive these gains to the very core of their business - cash flow generation, Return on Invested Capital (ROIC), and Economic Value Added (EVA).