Economic Value Added (EVA)
Economic Value Added (EVA), or
is a widely recognized tool that is used to measure the efficiency with
which a company has used its resources. In other words,
EVA is the
difference between return achieved on resources invested and the cost of
resources. Higher the EVA, better the level of resource unitization.
The Tree of
How EVA Is Calculated
EVA = Net Profit (after tax but before
interest) less cost of capital employed (equity + debt).
Interest is not taken as an expense since this
is part of cost of capital (interest on debt).
7 Routes to
EVA and Your
Company's Market Capitalization
Market Value Added (MVA) –
which is the difference between the market value of the company and the
total capital invested in the company – recognizes
the EVA performance of companies. Positive MVA indicates creation of wealth
and a positive EVA and vice versa.
Your Revenue Model
Revenue Model lays-out the process by which a
company actually makes money by specifying how it is going to charge for the
Finding New Opportunities
for Profitable Growth
To find and pursue new opportunities you must develop a clear point of view
about sustainable growth and make
it a part of your company's genetic code. Leaders that go away from
muddling along in a mature industry and toward coming alive with
identify opportunities, develop selection criteria, select the avenues
profitable growth and
pursue opportunities –
At Monsanto, when it started its
from a chemical giant to a life sciences company, reward systems
have been redesigned to focus on growth and instill a sense of
in the corporation. Monsanto granted stock option to the 95% of
employees who previously didn't participate in a stock-option program. Economic Value Added (EVA) was adopted as the primary measure of
financial performance. Incentive plans are tied to EVA, and employees
eligible for management incentives have had a portion of their incentive
converted into option...