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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.

Collins Dictionary of Business, 3rd ed. © 2002, 2005 C Pass, B Lowes, A Pendleton, L Chadwick, D O’Reilly and M Afferson
References in periodicals archive ?
Net operating profit after tax (NOPAT), net cash flow (NCF), and economic value added (EVA) represent the independent variables in this study.
Debtors turnover ratio ([DTR.sub.i]), Earnings per share (EPS;), net profit margin (NPM;), return on equity ([ROE.sub.i]), dividend per share (DPS;) and economic value added (EVA;) are the independent variables for the ith firm, [e.sub.i] represents the error term for the firm i, i = 1, ..., 201.
and Narang, S., Economic value added reporting and corporate performance: A study of Satyam Computer Services Ltd.
Economic Value Added (EVA): Its Usefulness in Predicting Company Performance in Malaysia.
Economic value added is the dependent variable in this study which can be calculated by the following formula:
The measure of economic value added (EVA) had the negative values in the majority of the entities analysed.
Dimitris Kyriazis and Christos Anastassis [2] studied the relative explanatory power of the Economic Value Added (EVA) model with respect to stock returns and firms' market values and compared them to established accounting variables in the context of a small European developing market namely the Athens Stock Exchange in its first market-wide application of the EVA measure.
Economic value added is an operating profit after taxes less a charge for capital equal to the product of capital and its cost.
The new report put the resulting difference in economic value added to the state economy at between -$117 and -$38 million and warned a bad year can spell a job loss for as many as 27,000 workers.
The purpose of this article is to identify the relationship between economic value added EVA and cash conversion cycle CCC in companies listed on Warsaw Stock Exchange.
According to many people in Europe, and to a lesser degree in North America, VBM relates to deployment of the logic of Economic Value Added (EVA[TM]), Shareholder Value Added (SVA) or Market Value Added (MVA).

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