What is EVA: Management Revolution Based on Enterprise Value

EVA (abbreviation of economic added value) performance evaluation index is an innovation of financial evaluation thought, which was first put forward by Stern Stewart consulting company in 1990 and has been widely used in the world. The innovation of this indicator is that it fully considers the capital cost of enterprises, and at the same time, it adjusts the profits obtained according to GAAP from the fundamental purpose of enterprise value appreciation, so it can evaluate the performance of enterprises more accurately. However, as the famous American accounting professor Zimmerman said, EVA "only solved 2/3" problem. Therefore, it is necessary for us to rethink the EVA performance evaluation index, not only to see its advancement compared with the traditional evaluation index, but also to clearly understand its inherent defects, thus pointing out the direction for further improving the enterprise performance evaluation system.

The basic idea of EVA is as follows:-the income gained by capital should at least compensate the risks borne by investors; In other words, shareholders must get at least the same rate of return as similar venture capital in the capital market.

Economic added value = net operating profit after tax-cost of capital = net operating profit after tax-total capital * weighted average cost of capital.