Economic value added (EVATM) was developed by and the trademark of consulting firm Stern Stewart. This measure is most closely linked to shareholder value over time. It is an estimate of the amount by which earnings exceed or fall short of the required rate of return that investors could achieve from alternative investments of similar risk.
EVA=NOPAT-(Cost if capital*Capital employed)
Where NOPAT is net operating profit after tax adjusted for non-cash expenses
Advantages of EVATM
1. Keeps the focus on shareholder value
2. The most meaningful measure of profit for shareholders
3. Easy to understand
Disadvantages of EVATM
1. Easy to manipulate
2. Short-term focus
3. Make comparisons difficult
Market value added (MVA)
MVA is the difference between the market value and the book value of a company’s invested equity and debt capital. It is not a performance measure but a wealth measure, it measures the level of value that a company has accumulated over time.
The higher the MVA, the more wealth the company has generated for its shareholders. A negative MVA means that the shareholders’ wealth has been eroded. The main problem with MVA is that it does not take opportunity cost if capital into account as EVATM does.
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