1. The Concept of True Value Creation
Developed and trademarked by Stern Stewart & Co., Economic Value Added (EVA) is a refined variant of Residual Income. It measures a company’s true economic profit by adjusting standard accounting figures to eliminate distortions caused by GAAP/IFRS rules, tracking whether a company has truly created value for its shareholders.
 
2. Structural Adjustments to Financial Records
To calculate EVA, standard accounting profit and capital employment figures must be adjusted. These adjustments treat short-term expenses that generate long-term value as capital investments instead:
+--------------------+---------------------------------------+------------------------------------------+

| Account Item       | Traditional Accounting Treatment      | EVA Capitalization Treatment             |
+--------------------+---------------------------------------+------------------------------------------+

| R&D Expenditures   | Expensed fully on the Income Statement| Capitalized as an asset and amortized    |
|                    | in the current period.                | across its useful life.                  |
+--------------------+---------------------------------------+------------------------------------------+

| Advertising / Brand| Expensed immediately as an operational| Capitalized as a long-term investment in |
| Marketing Costs    | overhead expense.                     | corporate brand equity.                  |
+--------------------+---------------------------------------+------------------------------------------+

| Bad Debt Provisions| Extracted to reduce Accounts          | Added back to assets to reflect the total|
|                    | Receivable values.                    | capital actually deployed in operations. |
+--------------------+---------------------------------------+------------------------------------------+

3. The Core EVA Equation
Once adjustments are applied, calculate EVA using the weighted average cost of capital:
EVA = (Profit after tax from operations) − (Capital charge for using investors’ money)
Where:
  • NOPAT: Net Operating Profit After Tax (adjusted to remove non-cash provisions and add back interest).
  • WACC: Weighted Average Cost of Capital (the combined average interest rate paid for debt and equity financing).

 
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