Economic Value Added (EVA)

Economic Value Added (EVA)

Economic Value Added (EVA)

The Value Added Economic (EVA) is defined as the amount remaining after covering all expenses and satisfied the performance minimum expected by the companies. The main innovation of EVA is that it incorporates the cost of capital in the calculation of the result of the business and its main purpose is to induce the behavior of leaders, guiding them to act like business owners. The EVA is making a difference in the world business, as it allows the companies that implemented optimize the management and increase the wealth they generate (Howe, 2002).

It is a way of measuring performance and is simply the money earned by a company less the cost of capital required to achieve these gains. EVA is also a set of administrative tools that is mindful of the amount of gain to be obtained to recover the cost of capital employed. It is a tool to calculate and evaluate the wealth generated by the company, taking into account the level of risk with which it operates. The EVA can be defined in more precise terms, as the difference between operating profit a company gets and the minimum you should get.

EVA is a management tool suitable for all businesses, including SMEs. Economic Value Added (EVA) is easy to calculate so the periodic calculation and analysis of EVA can be made ??with minimal effort because we need little data to do so and that such data are available on the accounting records. The calculation of EVA is the starting point for performance improvement. EVA can help make an optimal allocation of capital resources that are rare for SMEs. The implementation of EVA helps to better define and understand the objectives by operational since the EVA helps the organization realize that capital is an expensive resource, its effect as now is the improvement of efficiency (Gilbert, 1994).

How is EVA determined?

The Measurement of Economic Value Added (EVA) is a powerful tool that allows knowing if a company creates or destroys value for its owners, managing to go beyond traditional measures to evaluate the management or performance of a global organization.

Criteria for Determining Eva

The EVA can be defined as the amount remaining after all expenses covered and satisfied the minimum return expected by investors (Jean, 2003). The main innovation of EVA is that it incorporates the cost of capital in the calculation of the business, and its main purpose is to induce the behavior of managers, guiding them to act like business investors. For the calculation of EVA is operated as follows:

EVA= Net Operating Profit After Taxes (NOPAT) - (Capital * Cost of Capital)EVA = NOPAT - (c × capital)

Where:

NOPAT: It represents the net result after tax on profits.

Cost of Capital: weighted average cost rate of capital of the company.

Capital: Capital invested by the company.

How Company Can Increase Eva

Defining EVA as a measure of value creation by the company, it is clear that every company will want to obtain the highest possible ...