Economic value added (EVA) is a performance metric that is very similar in approach to Residual
Income, and is defined as being:
EVA = Net operating profit after tax – WACC x book value of capital employed
EVA is a trade-marked technique, developed by consultants called Stern Stewart and Co.
The principle behind it is that a business is only really creating value if its profit is in excess of the required minimum rate of return that shareholders and debt holders could get by investing in other securities of comparable risk.
The capital employed is the opening capital employed, adjusted fro the items set out below.
EVA allows all management decisions to be modelled, monitored, communicated, and compensated in a single and consistent way – always in terms of the value added to shareholder investment.
However, EVA makes certain adjustments because certain types of expenditure which appear in the statements of profit and loss under ISAs and IFRSs are NOT regarded as expenses when using EVA and cash accounting is regarded as more reliable than accruals accounting).
The capital employed used in EVA is the OPENING capital employed. Therefore if the non-cash expenses were accounted for this year they have to be added for NPAT but not for CE.
If they relate to a previous year then they must be added to CE but, because they have no effect on this years profit need not be added back for NOPAT.
HTH
Dear sir, I am totally confused about adding back non cash expenses in the capital employed.. there are sources which says we should add it there and some do not. Could you please help me. Thank You