What does economic value added (EVA) measure?

Economic Value Added (EVA) measures financial performance based on residual wealth, which is the net profit after deducting the cost of capital. This concept emphasizes the importance of generating returns that exceed the cost of capital used to fund the company's operations. In essence, EVA represents the value created over and above the required return of the company's investors.

The calculation of EVA involves taking the net operating profit after taxes (NOPAT) and subtracting the capital charge, which is derived from the total capital employed multiplied by the weighted average cost of capital (WACC). Therefore, EVA allows stakeholders to assess how effectively a company is utilizing its resources to generate value beyond the capital costs.

Other options either do not capture this broader perspective on measurement or focus on specific aspects of financial performance that do not provide a complete view of value creation. This makes the understanding of EVA particularly valuable for both performance evaluation and decision-making within an organization, highlighting its role in assessing true economic profit.