Economic value added (EVA)
Estimate of true economic •
profit after adjustments for
GAAP accounting
Conventional measure • +
GAAP adjustments less
cost of capital charge on
divisional assets.
EVA focuses on the long-•
term NPV of a company.
Emphasises cost of capital.•
EVA is based on cash flow •
and hence less distorted
by the accounting policies
chosen.
Gives an absolute figure.•
Reflects performance in •
monetary terms
Links Statement of Financial •
Position (balance sheet) to
Income Statement
Makes managers •
accountable for resources
used to achieve results
Based on historical accounts.•
EVA does not measure •
NPV in the short-term.
Assumptions made to •
calculate cost of capital.
Other value drivers such •
as non-capitalised goodwill
may be important despite
being excluded from the
accounts.
Making the necessary •
adjustments can be
problematic.
EVA gives an absolute •
measure so inter-company
comparisons between
companies of different
sizes is difficult.
Difficult to calculate and •
understand