Economic Value Added (EVA)

A relatively complex method of evaluating profitability that takes into account the Cost of Capital. It allows shareholder expectations as much weight as the rate of interest on debt; the appropriateness of this is debatable. The practical impacts are 1) to require very high levels of profit before the company is deemed to be ‘adding economic value’, 2) to increase the amount of short-term thinking by managers, and 3) to improve share prices in the short term.

EVA was created by consultants Stern Stewart & Co.

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