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Economic Value Added (EVA)

For informational and educational purposes only • Not investment advice.

Compare EVA estimates across companies

Nvidia
Estimated Fair Value$146.34
Current Stock Price$229.28
Current EVA$166.0B
ROIC108.0%
WACC15.2%
ROIC Spread92.8%
Detailed valuation
Apple
Estimated Fair Value$159.10
Current Stock Price$336.64
Current EVA$109.8B
ROIC69.9%
WACC10.4%
ROIC Spread59.5%
Detailed valuation
Alphabet
Estimated Fair Value$388.58
Current Stock Price$351.66
Current EVA$186.0B
ROIC44.3%
WACC10.7%
ROIC Spread33.6%
Detailed valuation
Microsoft
Estimated Fair Value$300.50
Current Stock Price$535.07
Current EVA$82.9B
ROIC26.1%
WACC10.2%
ROIC Spread15.9%
Detailed valuation
Revenue Growth Rate
Forecast Horizon
Equity Risk Premium
%
Range: 2–10%

What is Economic Value Added (EVA)?

Economic Value Added (EVA) measures whether a company generates operating profit above the required return on the capital invested in its business. Unlike accounting profit, EVA recognizes that both shareholders and lenders require a return on the capital they provide.

A company creates economic value when its Net Operating Profit After Tax (NOPAT) exceeds the Capital Charge on its Invested Capital. The present value of future EVA is then combined with Invested Capital to estimate the value of the operating business.

EVA Formulas

Economic Value Added
EVA=NOPAT−(WACC×Invested Capital) EVA = NOPAT - (WACC \times \text{Invested Capital})
Operating Value
Operating Value=Invested Capital+PV(Forecast EVA)+PV(Terminal EVA) \text{Operating Value} = \text{Invested Capital} + PV(\text{Forecast EVA}) + PV(\text{Terminal EVA})
Fair Value per Share
Fair Value Per Share=Operating Value−Net DebtShares Outstanding \text{Fair Value Per Share} = \frac{ \text{Operating Value} - \text{Net Debt} }{ \text{Shares Outstanding} }

How Economic Value Added Works

Economic Value Added starts with the capital invested in the business, measures whether after-tax operating profit exceeds the required return on that capital, forecasts future economic profit, discounts it back to today, and combines it with invested capital to estimate fair value.

Calculate Invested Capital
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Calculate NOPAT
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Estimate WACC
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Calculate Current EVA
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Forecast Future EVA
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Discount Future EVA
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Add Invested Capital
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Adjust for Net Debt / Cash
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Fair Value Per Share

Key Model Assumptions

• Invested Capital represents the capital employed in the company's operating business.
• Current Revenue and EBIT use trailing twelve-month (TTM) values when available, with the latest annual values used as a fallback. Current EBIT is used to calculate NOPAT and current EVA.
• Forecast EBIT Margin gradually converges toward a normalized margin based on the median of up to the five most recent valid historical EBIT margins.
• WACC represents the required return on Invested Capital.
• The Risk-Free Rate is based on the U.S. 10-Year Treasury yield published by the Federal Reserve Board.
• Revenue Growth gradually converges toward the Terminal Growth Rate over the forecast period.
• Forecast EBIT Margin gradually converges toward a normalized margin based on the median of up to the five most recent valid historical EBIT margins.
• Forecast Invested Capital is estimated from Revenue using the Sales-to-Capital Ratio.
• Positive EVA indicates economic value creation, while negative EVA indicates economic value destruction.

Step 1 — Calculate Invested Capital

Operating Current Liabilities = Total Current Liabilities − Short-Term Debt
Invested Capital = Total Assets − Cash & Cash Equivalents − Operating Current Liabilities

Invested Capital represents the capital employed in the company's operating business and therefore the capital on which investors require a return.

The model estimates Invested Capital from Total Assets after removing Cash and Operating Current Liabilities. Short-Term Debt remains part of financing capital and is therefore excluded from Operating Current Liabilities.

Step 2 — Calculate Current NOPAT

NOPAT = Current EBIT × (1 − Tax Rate)

NOPAT (Net Operating Profit After Tax) measures the company's current after-tax operating profit before financing costs such as interest expense.

The model calculates current NOPAT from the company's current EBIT base, using trailing twelve-month (TTM) EBIT when available and the latest annual EBIT as a fallback. The effective Tax Rate is then applied to determine after-tax operating profit.

This provides the operating profit used to calculate current ROIC and Economic Value Added.

Step 3 — Calculate WACC

WACC = Equity Weight × Cost of Equity + Debt Weight × After-Tax Cost of Debt
Cost of Equity = Risk-Free Rate + Beta × Equity Risk Premium
After-Tax Cost of Debt = Cost of Debt × (1 − Tax Rate)

The Weighted Average Cost of Capital (WACC) represents the required return demanded by shareholders and lenders.

The model uses WACC to calculate the Capital Charge on Invested Capital and to discount future EVA back to present value.

Step 4 — Calculate Economic Value Added (EVA)

Capital Charge = WACC × Invested Capital
Economic Value Added:
= NOPAT − Capital Charge
= (ROIC − WACC) × Invested Capital

The Capital Charge represents the minimum return that shareholders and lenders require on the company's Invested Capital. It is calculated by applying WACC to Invested Capital.

Economic Value Added (EVA) is the operating profit remaining after this Capital Charge has been deducted from NOPAT.

EVA can also be expressed as (ROIC − WACC) × Invested Capital. When ROIC exceeds WACC, the company creates economic value. When ROIC is below WACC, economic value is destroyed.

Step 5 — Forecast Future EVA

Forecast EVAₜ = Forecast NOPATₜ − (WACC × Forecast Invested Capitalₜ)
Forecast Revenueₜ = Revenueₜ₋₁ × (1 + Revenue Growthₜ)
Forecast EBITₜ = Forecast Revenueₜ × EBIT Marginₜ
Forecast NOPATₜ = Forecast EBITₜ × (1 − Tax Rate)
Sales-to-Capital Ratio = Starting Revenue / Current Invested Capital
Forecast Invested Capitalₜ = Forecast Revenueₜ / Sales-to-Capital Ratio
Present Value of EVAₜ = Forecast EVAₜ / (1 + WACC)t

Revenue, EBIT and NOPAT are projected over the forecast period, while Forecast Invested Capital is estimated using the Sales-to-Capital Ratio. The EBIT Margin gradually moves toward a normalized target based on the median of up to the five most recent valid historical EBIT Margins.

The Capital Charge is then deducted from Forecast NOPAT to calculate EVA for each year. Each Forecast EVA is discounted back to present value using WACC.

Step 6 — Calculate Terminal EVA

Terminal EVA = Final Forecast EVA × (1 + Terminal Growth) / (WACC − Terminal Growth)
Present Value of Terminal EVA = Terminal EVA / (1 + WACC)n

Terminal EVA represents the economic value expected to be created after the explicit forecast period. The final Forecast EVA is grown at the Terminal Growth Rate and capitalized using WACC.

The resulting Terminal EVA is then discounted back to present value. If the final Forecast EVA is not positive, the model assigns no Terminal EVA.

Step 7 — Calculate Fair Value per Share

Operating Value = Invested Capital + Present Value of Forecast EVA + Present Value of Terminal EVA
Equity Value = Operating Value − Net Debt
Net Debt = Total Debt − Cash
Fair Value per Share = Equity Value / Shares Outstanding

Operating Value is calculated by adding current Invested Capital, the Present Value of Forecast EVA and the Present Value of Terminal EVA.

Operating Value is then adjusted for Net Debt or Net Cash to determine the Equity Value attributable to common shareholders.

Equity Value is divided by Shares Outstanding to calculate the estimated Fair Value per Share.