Economic Value Added (EVA) is a financial performance metric that measures a companyís true economic profit by assessing how efficiently it generates returns beyond its cost of capital. It helps investors and management determine whether the business is creating or destroying shareholder value.

Definition:
EVA is the surplus left after deducting the cost of capital from the companyís net operating profit after tax (NOPAT). It shows the amount of value a company adds to shareholders over and above the minimum required return.

Formula:
EVA = NOPAT ñ (Capital Employed ? Cost of Capital)

Example:
If a company earns a NOPAT of ?200 crore, has capital employed of ?1,000 crore, and its cost of capital is 12%, then:
EVA = ?200 crore ñ (?1,000 crore ? 12%) = ?200 crore ñ ?120 crore = ?80 crore.
This means the company generated ?80 crore of value for its shareholders.

Key Components of EVA:
- Net Operating Profit After Tax (NOPAT): Measures operating performance after tax but before financing costs.
- Capital Employed: The total funds invested in the business (equity + debt).
- Cost of Capital: The minimum return required by investors and lenders for their investment risk.

Importance of EVA:
- Helps assess value creation rather than accounting profit.
- Aligns management decisions with shareholder interests.
- Aids in performance-based compensation systems.
- Useful for comparing profitability across firms and industries.

Interpretation:
- A positive EVA indicates the company is generating returns greater than its cost of capital, thereby creating value.
- A negative EVA means the business is not covering its capital costs, implying value erosion.

Conclusion:
Economic Value Added (EVA) is a vital measure of economic performance and capital efficiency. Unlike traditional profit metrics, EVA focuses on long-term wealth creation, encouraging businesses to make sustainable, value-driven decisions.