Economic Value Added

In the mid-1990s, a management concept, economic value added (EVA), was moved from a buzzword to an important financial tool. EVA is the after-tax net operating profit minus the cost of capital. It measures whether a business earns more than the cost of capital. EVA is being used as a performance measure, as an analytical financial tool, and as a management discipline measure. Various economic sectors like manufacturing industries, health-care companies, and the postal service are among the enterprises using EVA to help manage their operations. It is an indication of how efficient management is at turning investor money, namely capital, into profits [7,8].

In periods when the economy is strong and sales are growing, the bottom line still might not show good results. EVA analysis helps companies identify waste and inefficiency in their daily operations and in the use of capital. It also aids in identifying high inventories as well as the need to reduce accounts receivable. In other words, EVA is a tool to improve overall efficiency. In some instances, EVA has demonstrated that debt capital is cheaper than equity capital. It gives management a clearer idea of whether they are increasing or decreasing stockholders' wealth. Stockholders can benefit from EVA analysis if it results in higher dividends and permits stick share repurchases. Further, some companies are tying EVA to salaries and bonuses of upper-level company executives.

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