EVA and Its Advantages

Economic Value Added (EVA) is a method to calculate the economic profit of a company. EVA can be calculated as Net Operating Profit after taxes less a charge for the opportunity cost of the capital invested. The underlying principal of this method is to determine whether company is earning higher rate of return on the funds invested than the cost of the funds. If it is earning higher rate of return then it implies that management is adding more wealth to the shareholders value.

Advantages of EVA

1. It helps the company in monitoring the problem areas and hence taking corrective action to resolve those problems.

2. It can also improve the corporate governance of the company because since a higher EVA implies higher bonuses to the managers they will be working hard and also honestly which in turn augurs well for the company.

3. Unlike accounting profit, such as EBIT, Net Income and EPS, EVA is Economic and is based on the idea that a business must cover both the operating costs as well as the capital costs and hence it presents a better and true picture of the company to the owners, creditors, employees, shareholders and all other interested parties.

4. It also helps the owners of the company to identify the best person to run the company effectively and efficiently.

5. Using EVA company can evaluate the projects independently and hence decide on whether to execute the project or not

However there are some disadvantages of EVA like it is difficult to compute and also it does not take into account inflation into its calculation. Therefore company should take into account above advantages and disadvantages before deciding whether to implement EVA or not

1 comment… add one
  • Salmanul farisi

    Good and helpfull for me at time of my pg level… Thanks for u, the person who give the information provide to me… And thanks for all…

Leave a Comment


Related pages


deffered revenue expenditurewhat is the full form of nasdaqsundry items examplesscheduled commercial banks meaningdisadvantages of economic globalizationstatutory liquidity ratio slrcomplements and substitutes economicscapm assumptions explainedenvironmental pollution advantages and disadvantageshypotheticationexample of cost push inflationjit production advantages and disadvantagesstatutory liquidity ratio in indiaunsystematic risksexamples of substitute goods and complementary goodsorder cheque and bearer chequelaw of diminished returnsmarket skimming price strategyfull form of capexthree golden rules of accountingcapitalist economy advantagesmarketing penetration strategy examplesecuritizing receivablesmerits and demerits of globalisationadvantage of lifofunctions of derivative marketpayback period meaningdefinition of capital reservedefinition of profitability ratiowhat is unsystematic riskfactoring vs forfaitingexplain privatisationexamples of inferior goods in economicsdisadvantage of international tradedistinguish between management accounting and cost accountingexample of horizontal mergerdefine demand depositskimming strategy definitionmsf in bankingwhat is demand loanadvantages and disadvantages of industrialisationkinds of price elasticity of demandhorizantal mergerstatutory liquidity ratio in hindiexamples of revenue expenditure and capital expendituretraditional economy advantages and disadvantagesexample of inelastic goodscost concept accountingdrawbacks of globalisationdupont system analysisstrengths and weaknesses of capitalismadvantage and disadvantage of bank loanunbilled revenuedisadvantages of a bank loanamortization expense journal entryentry for prepaid expensedemerits of social networkingconglomerate diversification strategy examplesprovision for salary journal entrydistinguish between explicit and implicit costsaccounting fifo methodmerits of advertisementwhat are the advantages and disadvantages of industrializationadvantages and disadvantages of jitkyc abbreviation financeadvantages and disadvantages of delegationsubstitutes and complements in economicsdisadvantages of decentralised structuretrial balance meaning in hindiadvantages of a planned economycomplementary and substitute goodssignificance of foreign exchange reserveswhat is bearer cheque