How to Find a Company's TRUE Profit - Economic Value Added Explained Simply | Summary and Q&A

TL;DR

Economic Value Added (EVA) measures a company's profitability by subtracting the cost of capital from net operating profit after tax.

Key Insights

• ↩️ Economic Value Added (EVA) helps assess a company's profitability by considering the return on investment after deducting the cost of capital.
• 👨‍💼 Positive EVA suggests that a company is adding value to its business and outperforming the cost of capital.
• 🚕 Decreasing the cost of capital or increasing net operating profit after tax can improve EVA.
• ❓ Economic Value Added provides a more accurate assessment of company performance compared to traditional measures like earnings per share.
• 🔬 EVA analysis can help investors make informed decisions about investing in a particular company.
• 👨‍💼 Consistently negative EVA may indicate that a company is consistently reducing the economic value of its business.
• 👨‍🔬 EVA can be used as part of a comprehensive research process to understand a company's performance and potential for investment.

Transcript

hi i'm jimmy in this video we're looking at a great way to look at the genuine profitability of a company beyond the typical earnings per share this is called economic value added you might hear you might see the shortened to eva or you might even hear it called something like economic profit so we're gonna look quickly at the formula for economic ... Read More

Questions & Answers

Q: What is Economic Value Added (EVA) and why is it important?

EVA is a measure that indicates how much a company is returning on top of its cost of capital. It helps investors understand the true profitability of a company by considering the return on investment after deducting the cost of capital.

Q: How is net operating profit after tax (NO PAT) calculated?

NO PAT is derived from net operating profit (EBIT) adjusted for taxes. The tax rate is multiplied by one minus the tax rate, then multiplied by EBIT, resulting in the net operating profit after tax.

Q: How is invested capital calculated?

Invested capital can be calculated by adding the equity from the balance sheet and any interest-bearing debt, such as bonds. This represents the total capital invested in the company.

Q: How is the weighted average cost of capital (WACC) determined?

WACC is calculated by combining the cost of debt and the cost of equity. These costs are weighted based on the proportion of debt and equity in the company's capital structure.

Summary & Key Takeaways

• Economic Value Added (EVA) is a method used to look at a company's genuine profitability beyond earnings per share.

• EVA is calculated by subtracting the cost of capital from net operating profit after tax (NO PAT).

• EVA provides a clearer picture of how a company is truly performing by considering the return on investment after accounting for the cost of capital.