What this calculator does
Accounting profit charges for debt but not for equity, which makes almost any profitable company look successful. Economic value added corrects that by charging for all the capital employed, at its full cost.
The result is a stricter test. Operating profit of $400,000 becomes $300,000 after tax, but $2,000,000 of capital at a 9 per cent WACC costs $180,000, leaving $120,000 of genuine value created. At $300,000 of operating profit the margin narrows to $45,000.
The formula
Operating profit is reduced by tax to give net operating profit after tax. The capital charge is invested capital times the weighted average cost of capital, and EVA is what remains after deducting it.
| Term | Meaning |
|---|---|
| NOPAT | Net operating profit after tax, before any financing costs. |
| Capital charge | Invested capital times WACC, the cost of all funding including equity. |
| EVA | NOPAT less the capital charge. Positive means value created. |
The inputs explained
| Field | What to enter |
|---|---|
| EBIT (operating profit) ($) | Operating profit before interest and tax. |
| Effective tax rate (%) | The effective tax rate as a percentage. |
| Invested capital ($) | Invested capital, meaning debt plus equity employed in the business. |
| WACC (%) | The weighted average cost of capital. |
When to use it
Assessing whether a division earns its keep
A profitable division that fails to cover its capital charge is consuming value.
Setting management incentives
EVA-based bonuses reward capital discipline rather than growth for its own sake.
Evaluating an expansion
Additional capital must earn more than its cost, not merely produce a profit.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How much profit does it take to cover the capital?
Three levels of operating profit against the same capital base.
| EBIT | Economic value added | Return on invested capital |
|---|---|---|
| $300k | $45,000.00 | 11.3% |
| $400k | $120,000.00 | 15.0% |
| $500k | $195,000.00 | 18.8% |
Questions
Why charge for equity?
Because shareholders could have invested elsewhere, and that forgone return is a genuine economic cost even though it never appears on the income statement. Ignoring it makes mediocre performance look like success.
Can a profitable company have negative EVA?
Easily, and many do. A company earning 6 per cent on capital that costs 9 per cent is profitable by accounting measures while destroying value by this one. That is precisely the gap EVA exists to expose.
How does this relate to ROIC?
Closely. EVA is positive whenever return on invested capital exceeds WACC, and the dollar amount is the spread between them multiplied by the capital. EVA gives the size of the effect, ROIC gives the rate.
What counts as invested capital?
Broadly, debt plus equity less non-operating assets such as surplus cash. Formal EVA implementations make numerous adjustments to the accounts, which is where much of the complexity of the method lies.
For the cost of capital being charged, see the WACC calculator. For returns on the capital employed, see the return on capital employed calculator.