Every investor want high profit in shares investing. They will analyze the fundamental share before investing. Some analyst use Economic Value Added (EVA) to predict the share returns beside EPS and Net Profit.

EVA is a profit measure for shareholder side. The formula is Net Operational After Tax (NOPAT) less with capital of cost of company. EVA could be used as the performance evaluation too and this measurement could predict the return of the stock.

According the inventor, Stewart & Co., EVA is an estimate of amount that earn differ from the required rate of return (against comparable risk) for shareholders or lender. The difference can be both surplus or a shortage.

The calculation of NOPAT should use Financial statement report data which has fulfill General Accepted Accounting Principle (GAAP) requirement. Since public company use GAAP principal, the calculation does not need adjustment. If the financial statement report does not use GAAP guidance, the accounting should adjust the entry.According to Stern Stewart, literately dozens of adjustments to earnings and balance sheets - in areas like R&D, inventory, costing, depreciation, and amortization of goodwill - must be made before the calculation of standard of accounting profit can be used to calculate EVA.

The Calculation of EVA:

Net Sales

- Operating expenses

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Operating profit

- Taxes

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Net Operating Profit After Tax (NOPAT)

- Capital Charges (Invested Capital x Cost of Capital)

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Economic Value Added

The Calculation is almost similar with Earning Before Interest and Tax. Unlike EBIT, EVA calculation consider the capital charges. we can determine capital charge by using weight average cost of capital.

For example Forlan Company records $ 100 millions sales in last year. The company has operating expenses around $ 25 millions. The corporate tax is 40%; meanwhile capital charges is $ 15 millions. What is EVA Calculation.

The EVA calculation of Forlan company (in Millions):

Net Sales $ 100

- Operating expenses $ 25

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Operating profit $ 75

- Taxes $ 40

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NOPAT $ 35

- Capital Charges or cost of capital $ 15

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Economic Value Added $ 20

The Forlan company has positive EVA, meaning the company performance is good and the investor may attractive to buy the shares. Wait a minute! A clever investor must analyze the historical company EVA. If Forlan company has higher previous years EVA, say 25, the investor might avoid to buy it. On the other hand a negative EVA could be a good sign for the investor, If the previous year EVA is lower than current EVA.

Here is some example problem perhaps you can solve it.

Calculate the company's EVA with below data:

Net Sales                                  : $ 250,000,000

Tax                                           :  40 %

Capital Charges                         : $ 350,000,000

Operating Expenses                  : $ 25,000,000

Is the EVA is good for the company? Will you buy the company's share?