Economic Value Added

CHAPTER 1
INTRODUCTION
1.1BACKGROUND:
EVA MEANING:
        The Term ‘Economic Value Added (EVA)’ is a registered trademark of Stern Stewart & co. New York City (USA). Bennett Stewart in his book, “The Quest for value”, used the term EVA with a symbol Tm as super script, which is the normal practice of referring to any registered trademark whenever the term is used. Thus EVA is actually Stern Stewart & co.’s trademark for the specific method of calculating economic profit. “The Quest for value” was published in 1991. Peter Drucker claimed that he discussed EVA in 1964 in his book “Managing for Results”. It cannot be denied, however, without going into argument as to who invented EVA first that the concept became popular only after Stern Stewart & co. marketed it.


        It deals with calculation of gain earned by the shareholders by investing in a company.


        The Economic Value Added (EVA) is a measure of surplus value created on an investment.


        EVA is net operating profit minus an appropriate charge for the opportunity cost of all capital invested in an enterprise. As such, EVA is an estimate of true   “Economic” profit, or the amount by which the earnings exceed or fall short of the required minimum rate of return that shareholders and lenders could get by investing in other securities of comparable risk.
      Economic Value Added is a financial performance measure that comes closer than any other to capturing the true Economic profit of an enterprise. EVA®   also is the performance measure most directly linked to the creation of shareholder wealth over time. Stern Stewart & co. guides client companies through the implementation of a complete EVA- based financial management and incentive compensation system that gives managers superior information and superior motion to make decisions that will create the greatest shareholder wealth in any publicly owned or private enterprise.
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