2 Excel Templates
1) Paper LBO Model
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The model can be adjusted very easily to any company. Keep you posted for the rest of the templates.
2) Prepaid Expenses Model
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Here are 2 Infographics for Today:
1) KPIs Handbook
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2) M&A Handbook
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Here’s today’s “How to” guide:
How to calculate Economic Value Added
Economic Value Added (EVA) is a financial performance metric that calculates the value a company or project creates beyond the required return on its capital.
It’s essentially a measure of a company’s financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis.
In the context of project evaluation, EVA can be particularly important for several reasons:
Focus on Value Creation
EVA shifts the focus from traditional accounting profits to value creation. It emphasizes the idea that a project should generate returns that exceed its cost of capital, which is the minimum acceptable return given the risk.
Incorporates Cost of Capital
By considering the cost of capital, EVA provides a more comprehensive view of a project’s financial performance. This is because it accounts for the opportunity cost of the invested capital, unlike traditional metrics like Net Income or Operating Profit.
Decision-Making Tool
EVA can be used as a decision-making tool for evaluating, comparing, and prioritizing different projects. Projects with a higher EVA are generally preferred as they indicate greater value creation.
Long-Term Perspective
EVA encourages managers to think in terms of long-term value creation rather than short-term financial gains.
Alignment with Shareholder Interests
Since EVA is concerned with creating value over and above the cost of capital, it aligns the project’s objectives with that of shareholders or investors, who are interested in returns that exceed the market’s required rate of return.
Here’s how to calculate Economic Value Added:
In the first step, we need a forecast of the net operating profit after tax.
Net operating profit after tax is calculated as the difference between sales and all operating expenses, minus corporate income tax.
In the next step, we need to calculate the invested capital.
Invested capital is the sum of capital expenditures and the increase in net working capital.
Finally, Economic Value Added is calculated per this formula.
EVA = NOPAT – (WACC * Invested Capital)
Where: NOPAT = Net Operating Profit After Tax.
Or, in the other words:
What you earn, minus what you would earn per required rate of return.
In our example, we calculated EVA for each year.
EVA is negative in the first year, which was mainly the result of the fact that the project was in the start – up phase and it could not generate an adequate level of sales.
However, in each of the following years, EVA is positive, which means the Company made a profit beyond the cost of capital on this project in each year.
Therefore, the project leads to the Company’s increase of value.
In case EVA is negative, it means that project profit is not sufficient to cover the costs of capital.
Negative EVA should be limited to project start – up phase only.