Measure whether profit exceeds the cost of the capital employed to generate it.
Accounting profit ignores the cost of equity, so a business can report profit while still destroying value. EVA charges for all capital employed, which is why the spread over the cost of capital is the figure that matters rather than the profit itself. A division can grow profit and shrink EVA at the same time by consuming capital faster than it earns; only EVA exposes that.
Economic Value Added
EVA = net operating profit after tax − (capital employed × cost of capital)
EVA = net operating profit after tax − (capital employed × cost of capital) Accounting profit ignores the cost of equity, so a business can report profit while still destroying value. EVA charges for all capital employed, which is why the spread over the cost of capital is the figure that matters rather than the profit itself.
A division can grow profit and shrink EVA at the same time by consuming capital faster than it earns; only EVA exposes that.
This calculator takes 3 inputs: Net operating profit after tax, Capital employed, Weighted average cost of capital. The pre-filled defaults are a realistic starting point — replace them with figures from your own environment for a result you can act on.