Economic Value Added (EVA)

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Definition of 'Economic Value Added (EVA)'

Economic value added (EVA) is a measure of a company's profitability. It is calculated by taking a company's net operating profit after taxes (NOPAT) and subtracting a capital charge. The capital charge is the cost of the capital that the company has used to generate its profits.

EVA is a more comprehensive measure of profitability than return on investment (ROI) or net profit margin because it takes into account the cost of capital. ROI and net profit margin only measure a company's profitability relative to its sales or assets, respectively. EVA measures a company's profitability relative to the cost of the capital that it has used to generate its profits.

EVA is a useful metric for evaluating a company's performance because it takes into account all of the costs associated with doing business, including the cost of capital. It can also be used to compare the performance of different companies within the same industry.

However, EVA is not without its limitations. One limitation is that it can be difficult to calculate. Another limitation is that it can be subjective to determine the appropriate capital charge.

Despite these limitations, EVA is a valuable metric for evaluating a company's profitability. It is a more comprehensive measure of profitability than ROI or net profit margin because it takes into account the cost of capital. EVA can be used to compare the performance of different companies within the same industry.

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