what is economic value added

Economic value added, or EVA, is a measure of the profit a company earns above the full cost of the capital it uses. It takes net operating profit after tax and subtracts a capital charge — the invested capital multiplied by the weighted average cost of capital. The result is the value created (if positive) or destroyed (if negative) in the period. EVA, also known as residual income, exists because ordinary accounting profit already deducts the cost of debt as interest but never charges for the cost of equity, so a company can look profitable while actually failing to reward its shareholders for the risk they bear.

how do you calculate eva

EVA equals net operating profit after tax (NOPAT) minus a capital charge, where the capital charge is the invested capital times the weighted average cost of capital (WACC). For example, a company with ₹112.5 crore of NOPAT, ₹900 crore of invested capital and a 10% WACC has a capital charge of ₹90 crore, giving an EVA of ₹22.5 crore. That positive figure means the company earned ₹22.5 crore more than the full cost of the capital tied up in it — genuine economic profit over and above what its financiers required.

what is the difference between eva and net profit

Net profit is an accounting figure that subtracts operating costs, interest on debt and tax, but it never charges anything for the equity capital shareholders have invested. EVA goes further and subtracts a charge for all the capital — equity included — at its full cost. So net profit answers "did the company make money for its accountants?" while EVA answers "did it make money for its owners after paying for the risk of their capital?" A company can have healthy net profit and negative EVA if its returns fail to clear its cost of capital.

why can a profitable company have negative eva

Because reported profit ignores the cost of equity, a company can post an accounting profit while earning less than its capital actually costs. If its return on invested capital is below its WACC, the capital charge in EVA exceeds the operating profit, so EVA is negative even though net profit is positive. This is common in capital-heavy businesses that grow by pouring money into low-returning assets: the income statement looks fine, but each rupee invested earns less than it costs, quietly destroying shareholder value — exactly what EVA is designed to expose.

What is EVA (economic value added) and how to calculate it

A company can report a handsome profit and still be destroying its owners’ wealth. The reason is a blind spot in accounting: the income statement charges for the cost of debt — interest — but never charges a paisa for the cost of equity. Economic value added, or residual income, fixes that by subtracting the full cost of all capital, revealing the profit that actually matters.

Profit minus a charge for every rupee of capital

EVA is NOPAT minus a capital charge, where the charge is the invested capital times the WACC. NOPAT is operating profit after tax; the capital charge is what the company’s financiers — lenders and shareholders — require for the money tied up in the business. If NOPAT clears that charge, EVA is positive and value was created; if it falls short, EVA is negative and value was destroyed, however profitable the income statement looked.

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Set NOPAT, invested capital and WACC, and watch the EVA — then lower the return or raise the cost of capital until a “profitable” company slips into negative EVA.

Worked example

Positive profit, and the EVA test

NOPAT ₹112.5 cr

NOPATOperating profit after tax₹112.5 cr

Invested capitalEquity + debt at work₹900 cr

Capital charge (10% WACC)900 × 10%₹90 cr

EVAValue created₹112.5 − ₹90 = ₹22.5 cr

If WACC were 13%Same profit, value destroyedEVA = −₹4.5 cr

At a 10% cost of capital the company creates ₹22.5 crore of genuine economic profit. Nudge the cost of capital to 13% and the identical NOPAT now produces negative EVA — the business is destroying value even though its accounting profit never moved. EVA is what makes that hidden shift visible.

Check yourself

A company reports a healthy net profit, but its ROIC is 9% while its WACC is 12%. What does EVA reveal?

Simple bhasha mein

Profit — poori capital ki fees kaat ke

Company profit dikha sakti hai par phir bhi maalikon ki daulat kha rahi ho. Kaaran: accounting profit debt ka kharcha (interest) toh kaatta hai, par equity ka kharcha kabhi nahi. EVA dono kaatta hai: NOPAT − (invested capital × WACC). ₹112.5cr − ₹90cr = ₹22.5cr value bani. Par ROIC 9% aur WACC 12% ho toh profit hote hue bhi EVA negative — value doob rahi. Bade capital mein tez badhti company sabse khatarnak: revenue badhta, EVA chupke se minus.

What to remember

EVA (residual income) is NOPAT minus a capital charge (invested capital × WACC).
Accounting profit charges for debt but never for equity; EVA charges for all capital.
Positive EVA means value created; negative EVA means value destroyed.
A profitable company has negative EVA whenever its ROIC is below its WACC.
It restates ROIC-minus-WACC in rupees, exposing capital-heavy growth that destroys value.

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Common questions

Short, direct answers to what people ask about this topic.

what is economic value added: Economic value added, or EVA, is a measure of the profit a company earns above the full cost of the capital it uses. It takes net operating profit after tax and subtracts a capital charge — the invested capital multiplied by the weighted average cost of capital. The result is the value created (if positive) or destroyed (if negative) in the period. EVA, also known as residual income, exists because ordinary accounting profit already deducts the cost of debt as interest but never charges for the cost of equity, so a company can look profitable while actually failing to reward its shareholders for the risk they bear.
how do you calculate eva: EVA equals net operating profit after tax (NOPAT) minus a capital charge, where the capital charge is the invested capital times the weighted average cost of capital (WACC). For example, a company with ₹112.5 crore of NOPAT, ₹900 crore of invested capital and a 10% WACC has a capital charge of ₹90 crore, giving an EVA of ₹22.5 crore. That positive figure means the company earned ₹22.5 crore more than the full cost of the capital tied up in it — genuine economic profit over and above what its financiers required.
what is the difference between eva and net profit: Net profit is an accounting figure that subtracts operating costs, interest on debt and tax, but it never charges anything for the equity capital shareholders have invested. EVA goes further and subtracts a charge for all the capital — equity included — at its full cost. So net profit answers "did the company make money for its accountants?" while EVA answers "did it make money for its owners after paying for the risk of their capital?" A company can have healthy net profit and negative EVA if its returns fail to clear its cost of capital.
why can a profitable company have negative eva: Because reported profit ignores the cost of equity, a company can post an accounting profit while earning less than its capital actually costs. If its return on invested capital is below its WACC, the capital charge in EVA exceeds the operating profit, so EVA is negative even though net profit is positive. This is common in capital-heavy businesses that grow by pouring money into low-returning assets: the income statement looks fine, but each rupee invested earns less than it costs, quietly destroying shareholder value — exactly what EVA is designed to expose.

Economic value added: profit after charging for all capital

Profit minus a charge for every rupee of capital

Common questions