SUBMITTED BY:

DIVYA BODDU
09020242007
• Registered trademark by its developer, Stern
Stewart & Co.

• “EVA is basically an estimate of the amount by

which earnings exceed or fall short of the
minimum rate of return for shareholders or
lenders at comparable risk.”

• Based on the principle that capital is NOT free.

EVA - (As a measure of Value creation
through Management of Profits)
EVA - (As a measure of value creation through
Management of Capital)
• Companies try to increase their EVA by:
 
 Increasing the NOPAT generated by existing
Capital
 Reducing the WACC
 Investing in new projects where the Return
exceeds the WACC
 Divesting Capital where the Return is below
the WACC
The market value of a company = Book
value of equity
+ present value of
future EVA
• Unlike market based measures, EVA can be
calculated at divisional (SBU) level.
• Unlike stock measures, EVA is a flow and can be
used for performance evaluation over time.
• Unlike accounting profits, EVA is economical and
is based on the idea that a business must cover
both the operating costs and capital costs.
• Setting organizational goals,
• Performance measures,
• Determining bonuses,
• Communication with shareholders
and investors,
• Motivation of managers,
• Corporate valuation and analysing
equity securities.
• EVA is a short-run concept that deals only with
the current reporting period.
• EVA is difficult to use for inter-firm and inter-
divisional comparisons
• Economic depreciation is difficult to estimate.
• Since it relies on invested capital, it is more or
rather ONLY suitable for analyzing asset-
intensive firms i.e., least suited for companies,
for whom assets are 'off balance sheet' or
intangible.