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
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