Economic Value Added (EVA) Key Terms
Learning how to figure an economic value added calculation to show your company's vitality
When sharing financial data about your company, you want to present it in the best light but also be as accurate as possible. Some companies prefer to use an economic value added analysis when measuring their operating performance. The fairly simple calculation allows companies to measure their economic success over time, factoring in both operating and capital costs. There are a number of key terms you'll need to understand in order to apply an economic value added analysis to your business.
Economic value added
Economic value added, or EVA, is an equation used by businesses to measure their value. Put in simple terms, the calculation subtracts capital from after-tax earnings. An EVA calculation gives significance to a company's value over a specific period of time.
Try: For an economic value added example of adjustments needed to successfully apply EVA, review the explanation in Investopedia.
Earnings before interest and taxes
Earnings before interest and taxes, or EBIT, is also sometimes referred to as operating profit. EBIT is a measure of earning power and is watched closely by investors. It indicates a company's ability to pay off creditors.
Try: 12Manage gives another explanation of EBIT as well as a mathematical formula for how to make your calculation.
Net operating profit after taxes
To calculate earnings after taxes, you'll want to use the net operating profit after taxes, or NOPAT, equation. The NOPAT is a calculation showing operating efficiency, what a company would earn if there were no debt. NOPAT is commonly used for an economic value added calculation.
Try: Look through this chart further explaining the NOPAT mathematical equation from Balance Sheet Walk.
Net income
Sometimes referred to as the bottom line, net income can also be called earnings or net profit. Net income is whatever's left after subtracting the costs of doing business, such as depreciation, interest and taxes.
Try: BusinessTown offers a further look into business income statements.
Equity capital
When the owners of the business use their own funds to generate business income, that's referred to as equity capital.
Try: Check out this U.S. Small Business Administration article explaining equity capital.
Cash flow
The ebb and flow of cash in and out of a business represents business activity. For accounting purposes, cash flow is recorded at the beginning and end of a certain period of time to show a positive or negative balance. A company's cash flow isn't a very good measure of economic vitality, because many factors can net a positive or negative cash flow that can turn around with one transaction.
Try: Get the basic information about cash flow from Bankrate.
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