Economic Value Added

Hallo readers, today I want to give you a material reading about ECONOMIC VALUE ADDED or we can called it “EVA”.  Anyone know about EVA? Let me explain you something about EVA J

According Amin Widjaja Tunggal (2008), Economic Value Added (EVA) is a financial management systeml to measure economic profit in a company, which states that welfare can only be created if the company is capable to fulfill all operating costs and capital costs.

The Economic Value Added concept was first introduced by G. Bennet Steward, III, Managing Partner from Stern Steward & Co in his book “The Quest For Value” (Harper Business, 1991). The EVA concept became financial management system. According to the Economist magazine (2 August 1997) more than 300 companies in the world had adopted this system that based from EVA (Economic Value Added). These companies for example such as Coca cola, Quaker Oats, Boise Cascade, Briggs & Stratton, Lafarge, Siemens, Tate & Lyle, Telecome New Zealand, Telstra, Monsanto, SPX, Herman Miller, JC penney, and US Portal Services (Joel M. Stern, 2001, page 15-16).

Economic Value Added (EVA) is profits that left after reduced by cost of capital which invested to produce that profits. EVA is a benchmark value-based financial performance. EVA is a brenchmark which explain the absolute amount from shareholder value that created in a given period, actually for one year. EVA provide a good brenchmark of the value added by the company to shareholders. Therefore, if manager focus on Economic Value Added, then it will help ensure that they operate in a consistent way to maximize shareholder value.

Economic Value Added is indicator of value created from an investment. Economic Value Added Positive if the result of return higher than rate of return that investor wanted it, which means company have maximize their company’s value or indicate crating value. Whereas Economic Value Added  indicate negative value, signify that company’s value is reduce so that the rate of return resulting lower than rate of return desired by investor, which means the company not success create the value for capital’s owner or indicate destroying value.