What is EVA?

EVA, short for Economic Value Added, is a measure of a company’s economic performance. It gives a perfect look at a business’ financial performance and health, and whether or not a company is actually creating wealth for shareholders.

EVA measures the total economic profile of companies by taking into account the required return of stakeholders. It provides you with a clear idea of whether a particular stock is performing better or worse than other comparable stocks. In essence, it allows you to compare the economic return of investment options that carry similar risk levels.

How is EVA better than common accounting reports?

The common practice is to evaluate a company’s profits from an accounting perspective. While those financial statements allow investors to see the logic behind a company’s value, it doesn’t indicate if a stock is actually creating wealth for its shareholders!

EVA considers factors that are not even included in common accounting techniques, even though they have a very real economic impact on a company. StockPointer allows you to see right through superficially good-looking accounting reports to avoid precarious, potentially disastrous investments. For instance, EVA reports would have allowed Enron investors to see how its accounting was hiding its grim future.

Case Study

While Enron is evidently in a class of its own when it comes to bad investments, the case study does demonstrate what kind of predictors can be unveiled by EVA.

There will always be companies who play fast and loose with their accounting to reach targets and put out a promising report. Some might, for instance, sell valuable assets to boost profits for a fiscal year, all the while hurting their economic outlook. In the graph below, you can see what such tricks would do to a company’s EPS (Earnings Per Share) versus their EVA.

While the earnings rose, the EVA clearly sank. This is the kind of essential insight StockPointer provides: the difference between a stock that’s good for you and a stock that’s good for accountants.

Is EVA right for me?

The EVA framework will allow you to systematically quantify the economics of a business, so you can make consistently smart choices about your investments. Whether you're a shareholder, investment advisor or portfolio manager, StockPointer is always the right tool.

Individual investor or investment professional? StockPointer is always the right choice.

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What about other period performance measures?

EVA is the best of all period performance measures, period.

Why? Because it combines all aspects of a company to clearly quantify its operating performance, or how well it turns your investments into profits. EVA hammers balance sheets, income, cash-flow, costs of the sources of capital and more into a cohesive score to deliver this crucial information more quickly and clearly than any other measure.

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