EVA as a superior measure of performance

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'Economic Value Added may be considered to be a conceptually superior measure of organization performance but has failed to move the emphasis for value drivers away from profit'

The consulting firm of Stern Stewart published The Real Key to Creating Wealth (John Wiley & Sons, New York, 1998) which "celebrates a revolution in management known as economic value added (EVA)." Stern Stewart claims that:
EVA is the only true indicator of business and management performance;
EVA is "today's hottest financial idea and getting hotter";
EVA "allows all financial decisions to be modeled, monitored, evaluated, communicated, and compensated in terms of a single measure"

Economic Value Added is often defined as the value of an activity that is left over after subtracting from it the cost of executing that activity and the cost of having lost the opportunity of investing consumed resources in an alternative activity.

The Fundamentals of Value Creation

EVA measures whether the operating profit is enough compared to the total costs of capital employed. Stewart defined EVA as Net operating profit after taxes (NOPAT) subtracted with a capital charge.
EVA = NOPAT - CAPITAL CHARGE
EVA = NOPAT - COST OF CAPITAL x CAPITAL EMPLOYED
Or equivalently, if rate or return is defined as NOPAT/CAPITAL, this turns into a perhaps more revealing formula:
EVA = (RATE OF RETURN - COST OF CAPITAL) x CAPITAL
Therefore if EVA is positive then firm is contributing to the value of the firm.

Let us understand the advantages of EVA

? It makes top managers responsible for a measure that they have more control over - the return on capital and the cost of capital are affected by their decisions.
? It helps in improvement of the utilization of the assets and also reduction in cost.
? This can also lead to reduction in cost of ...