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In an ever-more saturated, globalised and demanding market, companies are forced to change the way they operate to be more efficient and adapt to phenomena such as liberalisation or digitisation. However, it is also essential that these changes are fully reflected in business indicators, so that they can abide by the decisions of managers and investors. One of the most recent, relevant and interesting indicators, which is studied in the degree in Economics and the Global Bachelor´s Degree International Business, is the Economic Value Added (EVA) or Economic Profit.
In 1989, the New York consulting firm Stern Stewart & Co. introduced and trademarked EVA, a variation or modification of what was previously called "residual income or profit". That is the result obtained by subtracting the capital costs from the operating profit.
Therefore, the economic value added (EVA) is the amount that remains in a business when it has covered all its expenses and the estimated minimum profitability. It is used as a financial performance method to calculate the actual economic profit a company earns.
EVA arose to cover the gaps and solve the limitations of the traditional economic indicators. Therefore, it can be used in all types of companies, from micro-SMEs to listed multinationals. In fact, it is not even a global indicator because it can also be applied to parts of companies, such as subsidiaries or business units.
The added economic value is used to determine the business objectives, measure the performance of the company and know the costs incurred. It provides a measure that allows you to align the goals of the company and determine if the capital investments are generating a return greater than their cost.
However, EVA is much more than an economic indicator, it reflects a business management focused on value. Its use allows managers to make decisions and design strategies aimed at creating value.
Added economic value is also a corporate communication tool aimed at investors and shareholders, since it allows evaluating the performance of the company and the level of risk that investing in it may represent. In fact, a good EVA can increase investor confidence and help the business continue to grow.
If you want more information about what corporate communication is, in this previously published post we will introduce you to the types of corporate communication and what to study to work in the sector.
EVA considers the productivity of all the factors necessary to carry out the business activity. The calculation of the EVA is complex, but it can be summarised in the following formula, according to a study published in the National Journal of Administration:
EVA = NOPAT - (Invested Capital * WACC)
In this case:
In the end, if the EVA result is positive, it means that the company has created value. In this case, the profitability generated exceeds the opportunity cost, although it should be clarified that companies that are in the process of expansion do not usually have a very high added economic value because their investments do not usually generate profitability in the short or medium term, but rather they destroy wealth. On the other hand, if the result of the EVA calculation is negative, it implies that the business has destroyed value.