BMS SSF- Write short note on Economic Value Added method (EVA)

Economic Value Added method (EVA): It is defined in terms of returns earned by the
company in excess of the minimum expected return of the shareholders. EVA is calculated as
follows:
EVA = EBIT – Taxes – Cost of funds employed = Net operating profit after taxes – Cost of
Capital employed.
Where, net operating profit after taxes = Profit available to provide a return to lenders and the
shareholders.
Cost of Capital employed = Weighted average cost of capital  Capital employed
EVA is a residual income which a company earns after capital costs are deducted. It measures
the profitability of a company after having taken into account the cost of all capital including
equity. Therefore, EVA represents the value added to the shareholders by generating
operating profits in excess of the cost of capital employed in the business.
EVA increases if:
(i) Operating profits grow without employing additional capital.
(ii) Additional capital is invested in projects that give higher returns than the cost of incurring
new capital and
(iii) Unproductive capital is liquidated i.e. curtailing the unproductive uses of capital.
In India, EVA has emerged as a popular measure to understand and evaluate financial
performance of a company. Several Companies have started showing EVA during a year as a
part of the Annual Report. Infosys Technologies Ltd. and BPL Ltd. are a few of them.