Economic Value Added

It appeared in HUL Annual Report 2012-13. Found it worth sharing.

EVA is residual income after charging the Company for the cost
of capital provided by lenders and shareholders.It represents the
value added to the shareholders by generating operating profits
in excess of the cost of capital employed in the business.

EVA will increase if:
a. Operating profits can be made to grow without employing
more capital, i.e. greater efficiency.
b. Additional capital’s invested in projects that return more
than the cost of obtaining new capital, I.e. profitable growth.
c. Capital is curtailed in activities that do not cover the cost of
capital, i.e liquidate unproductive capital.

EVA = Net Operating Profit after taxes (NOPAT) – Cost of Capital Employed (CoCE)

NOPAT is a company’s after- tax operating profit for all investors, including shareholders and debt holders or EBIT x (1-Tax%)

CoCE = Weighted Average Cost of Capital (WACC) x Average
Capital Employed

where WACC=Ke*We +Kd*Wd*(1-Tax%)

Ke -cost of equity,  Kd – cost of debt

Wd – weight of equity, Wd – Weight of debt

Capital Employed = Debt+Equity or NWC + NFA or Total Assets – CL

EVA1

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One thought on “Economic Value Added

  1. Reblogged this on prashant99 and commented:

    Analyzing equation:
    EVA = Net Operating Profit after taxes (NOPAT) – Cost of Capital Employed (CoCE)

    EVA=NOPAT – ( CE x WACC )

    EVA/CE = NOPAT/CE – WACC

    EVA/CE = ROIC – WACC

    EVA = CE x (ROIC – WACC)

    *ROIC – Return on Invested Capital, CE – Capital Employed

    Therefore EVA can also be defined as spread between the return
    on invested capital and the cost of capital times the amount of invested capital.

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